Operations Management : Module 2 Assignment 1

Operations Management : Module 2 Assignment 1

Improving Business Finances and Operations Specialization by University of Illinois at Urbana-Champaign

®γσ, Eng Lian Hu 白戸則道®

2016-06-18

1. Introduction

Instructions

The purpose of this assignment is to give you the opportunity to apply the concepts you have learned in this module and to discuss some of the key ideas of the module in your own words. Follow the instructions provided and respond to each question. This a required activity for this module.

Submit your answers to each of the questions based on the information provided below. Enter your answers directly in the spaces provided in the My submission tab. You may save a draft of your work as you go, and you can come back later to continue working on your draft. When you are finished working, click the Preview button, verify your identity, and then click Submit for review to submit the assignment. Please answer each question fully and concisely.

The discussion of the assignment solution is provided in the Module 2 Assignment 1 Solution video. Do the assignment on your own first, before viewing the assignment discussion video!

Module 2 Assignment 1

Renovation Homeware has been manufacturing dining room furniture for several furniture outlets in the U.S. since 1969. The company is known for their dining room sets – tables, chairs, consoles, and sideboards – in which they offer tremendous choices and allow customization for dimensions, wood finish, upholstery, and fittings. The average promised lead time for their orders is eight weeks. Until recently, they were able to provide delivery within the promised due dates for 99.2% of orders, with an occasional slipup causing orders to be at most five days late. However, in the past two years, over 33% orders have been over three weeks late, leading to several complaints from buyers.

Renovation prides itself on the quality of the furniture they produce and their willingness to incorporate requests for changes until the last possible time until the order is released to production. Their manufacturing operation is set up by departments. Wood cutting, upholstery storage and cutting, assembly, hardware fitting, polishing, finishing, inspection, and packaging are organized as separate mini-shops, and furniture makes its way through these departments as needed. A sophisticated scheduling system helps them keep track of due dates and job schedules.

There has been a shift in the mix of orders for Renovation, and this shift appears to mirror a change in the customer mix. Compared to two years ago, order sizes of 1 to 5 sets of one type have been reduced to half of what they used to be, while order sizes of 45–50 sets of one type with hardly any customization have nearly doubled. The customer mix now includes more retail chains, besides the traditional boutique stores and interior designers. As a sign of this increasing trend, one of Renovation Homeware’s major customers, Eat-In Dining Rooms, recently contacted them with a potential order of 125 single type of dining room sets for their newly expanded stores and warehouses in the Midwestern U.S. This order is for one of the cheaper sets that Renovation makes and requires no other customization other than two wood finish types in the mix. Until now, Eat-In’s order quantities for any one set had been quite small, with the largest order size being 5, even when the total order was for a larger quantity of up to 100. For the current large-volume order, Eat-In is demanding a shorter lead time of six weeks and is pushing for a discounted price, citing the large quantity of the same set as a reason. Such demands for price discounts have also been brought up recently by buyers for several other furniture outlets, although it has never been an issue in the past.

The production manager for Renovation, Cynthia Natarajan, is in a fix. On the one hand, there is the potential for increasing sales by accepting large orders of identical sets, albeit at discounted prices. On the other hand, she has longstanding customers of customized sets complaining about slipping on delivery dates and workmanship. She is also not sure how she can provide the high volume orders at shorter lead times. The marketing manager, Vera DeLillo, believes that customers deserve the quantity discounts for larger orders and does not see why Cynthia is not able to extract efficiencies from large volumes of the same sets as well as provide products more quickly than before.

Cynthia believes that there are some long-term operations strategy decisions that need to be made and that may need investments in the production process. She has scheduled a meeting with the marketing manager, Vera DeLillo, and the managing director, Gene Phang, to explain, from an operations management perspective:

  1. The causes of the current delivery date problems and the challenges in accepting the new large-volume orders with the current process design

  2. A proposed process design for accepting the new large-volume orders while continuing to serve the remaining customized orders customers.

  3. Other solutions for consideration that would require a shift in overall business strategy

Based on general guidelines about matching process arrangements to product requirements, please help Cynthia Natarajan put together information on all three topics.

2. Operational Concepts

Part 1

Discuss the causes of the current delivery date problems and the challenges in accepting the new large-volume orders with the current process design.

Let’s summarise the problem, the previous orders might a lot of scattered customers who order 1-5 sets but now the orders by wholesalers/retailer chain for 45-50 sets have blooming.

We can know the company is small but not a huge business group since previously majority orders are 1-5 sets but recent 2 years became mostly on 45-50 sets and maximum 100 sets. The customization request from customers became more complicated due to high volume and diversified designs.

  • Insufficient resource: Insufficient staffs to produce high volume orders. It might includes the stockkeepers, delivery mans, and production staffs. The existing machine, delivery transportation and also the supplied material might also insufficient. There has another issue which might probably existing huge cargo for logistics have not enough as well. The high volume orders might probably includes diversified design of products. A high volume of diversified products might probably need higher technological machine to produce it compare to existing machine.
  • Skilled staffs: Due to the high volume orders have blooming recent two years, the existing skilled staffs unable handle sudden high volume orders smoothly. Meanwhile, there might probably new employed staffs not yet master the skills.
  • The smoothness of operation flow: Insufficiency of resource on manpower, materials, machine, logistics might cause the conflicts of priority and also sufficiency of stocks for delivery. For example, some return stocks might disturb the planned logistical line. There will be another issue to the logistics staffs work in new opened store in Midwestern US where they are not familiar with the location of the distributors/agencies to avoid the heavily traffic routes.
  • Productivity: The high volume orders might exhaust a lot of human resource as well as machine. For example, the machines keep up running 24 hours everyday might need mainatenance. Insufficient staff might forced existing staffs to work overtime in order to completed the stocks. However longtime working without rest/idle time might decrease the productivity of staffs. Same with inssuficient machine while some need to be maintain for continue using.
  • Customization of orders: When the volume of orders increasing, the number of customization request on the design for the products will also increase. The customization request from customers might always interrupt the process of produce. Let say a customer request to change the design upon get the view of the products, if who keep request to modify the design during the process of produce the product a high cost might made to the company. Besides, the completion and also delivery time spending will be increase.

Part 2

Propose a process design for accepting the new large-volume orders while continuing to serve the remaining customized orders customers.

  • Limitation: Set a limit of customization request, for example a customer might only entitle free charges customization for two times. There will be a certain charges after that.
  • Time restriction: Set a closing time for customization request in advance to start stocks-in and produce the products. A high volume order might need a lot of raw material to produce while a time setting will reduce the probability of stock return to supplier. It will affect the business cooperation between the company and also material suppliers if the frequency of stock return request is high. Other than that, a certain charges might also cost to the company since the material suppliers have other distributors and buyers.
  • Minimum Requirement: Set a minimum requirement to customers/wholesalers which is only order a certain amount can be entitled the benefit.

Customization Service to Customers

Order.Amount Number.of.Allowed.Customization Allowed.Customization.Days.In.Advance Estimated.Delivery.Time.in.Week
(1,5] 0 0 1
(5,10] 0 0 1
(10,15] 0 0 1
(15,20] 0 0 1
(20,25] 0 0 2
(25,30] 1 0 2
(30,35] 1 0 2
(35,40] 1 0 2
(40,45] 1 1 3
(45,50] 1 1 3
(50,55] 2 1 3
(55,60] 2 1 3
(60,65] 2 1 4
(65,70] 2 1 4
(70,75] 3 1 4
(75,80] 3 2 5
(80,85] 3 2 5
(85,90] 4 2 5
(90,95] 4 2 6
(95,100] 4 2 6
>100 unlimit 2 7

Table 2.1: Sample table of customization service

Above is a sample table to differentiate the customization service provides to customers based on different Order Amount, The allowed days for customization count from the date of signed order. The estimated delivery time (in week unit) is count from the date of signed order. Due to I never work in furniture industry and unable to estimate the delivery time, here I simply set a time duration for sample only.

Part 3

Discuss other solutions for consideration that would require a shift in overall business strategy.

  • Downpayment: A certain amount or percentage of the price for the orders need to be paid in order to reduce the loss of stock return. High volume orders do not means all will be receivable sales. If the marketing department keep hard selling with promotion with discounted price or booking without down-payment might probably make loss to company. For example, a high volume of stock return might loss all the costs (overhead cost, fixed rental and utilities cost, material cost, salary wages flexible cost etc.) to produce the product and eventually return back. The store will occupied with a lot of returned stock. The durability of wooden furniture might not very long since it might be spoiled due to erosion by termites in store. A certain period of fund chasing need to be scheduled to manage the success of receive the receivable debt from sales.
  • Number of diversified products: A certain maximum set of orders might probably given by production manager based on their department’s capability. Some furniture might cost a lot of time to produce compare to others. A list of the products and time spending schedule or time table will easier for whole operation flow since production manager might estimate how much of furniture might completed within a certain period and predictable and easier for marketing department to elaborate to customers about the estimated delivery time.
  • Statistical Analysis: Besides, there will be a long term benefit if accounting department can apply statistical analysis on the cost per raw material and per item of very single product (includes analyse the mean, standard errors, and count in the average spoiled items might probably occurred within a certain number of products) will easily to know the operating cost and also price setting, discount rate for wholesalers etc and the profit will be more easier to control. A certain discount might apply to reduce the bad debts and increase the receivable debts.
  • Logistics: The high volume orders might come from everywhere around US. The new opened store in Midwestern US will definitely increase the delivery time. However a schedule and the clients within territory need to be assign to easier for stocks delivery and also customer servicing. Since the company has a sophisticated scheduling system (Assume the system is similar with Walmart, which is the distributors and suppliers can directly know their stocks level, location of stocks, price of stocks, connecting store is which nearest store etc. It will make both distributors and also suppliers manage their stocks by themselves with certain authority) the distributors within the area might easily know the stocks and when need to be refilled.
  • Customers Classification: Categorize customers level in order to eaisier for operation. We can categorize ordinary, bronze class, silver class, gold class and platinium class customers to enjoy different benefit. The services provided are defference accordingly. The database can be included the number of complaint and also the type of complaint in order to categorise the priority to solve. The more number of complaint on a particular issue will be higher priority to solve. The Table 2.1 is a simple table to categorise the customers.
  • Differentiate Department: Base on the Customers Classification, the furniture company might seperate 6 operational teams/departments to produce the ordinary, bronze class, silver class, gold class, platinium class and also a special team while the number of staffs will be different as well. Standardize the production line will increase the productivity since different team will easily learn how to handle the certain amount of orders and customers’ class. Meanwhile the skilled staffs might take turn to exchange between classes/teams to learn how to different customers’ class. The world first CEO — Jack Welch used to emphasize the trainning, research and development deopartment is the core department in General Electric. The exchange between teams/departments might consider as a trainning during working for small company while there will be best if the company can setup a training department to assess the quality of staffs every week to maintain at a certain level of quality of company for long term growth.
  • Short Term Planned Design: pre-lesease the catalogue of planned design of furnitures within next 3 years to distributors and also wholesalers. Firstly, it will make wholesalers view the coming design prior to booking, and it will be easier for designer to design and also customize the design of furnitures prior to launch and sell to distributors/wholesalers.

3. Conclusion

I tried to write my answer above based on my understanding on the assignment prior to watch below video. I do say sorry since my Enlish language is not good. Below is the answer from my peers.

Part 1

Discuss the causes of the current delivery date problems and the challenges in accepting the new large-volume orders with the current process design.
The causes of the current delivery date problems are below highlighted:-

          - Company’s existing capabilities and product requirements by customers is in misalignment and late delivery being the consequence.

          - Existing process design cannot effectively address customer varying needs.

          - Orders traffic has increased considerably in recent times especially for standardized products and therefore affecting the lead time.



The challenges in accepting the new large-volume orders with the current process design are:-

          - Inevitable late delivery.

          - Total system constraint as the job shop environment is not designed for large repetitive production system.

         -Job shop is characterized by high-mix, low-volume production, therefore difficulty in maintaining large quantity of raw material                inventories may be experienced.

          -Overtime may be invoked so as to meet delivery schedules.

          -Paradigm shift to batch arrangement from make-to-order demand driven business model might not be feasible overnight.

Part 1 is worth 5 points total. Points are only given for correct/reasonable answers in the manner specified below; incorrect/unreasonable answers get zero points.

- 0 pts No answer, or irrelevant answer
- 1 pt Superficial mention of one process design aspect or operations strategy concept applicable to the question
- 2 pts One specific process design aspect or operations strategy concept correctly covered in the answer, with specific connection to the context of the case
- 3 pts Superficial mention of another (beyond the one mentioned for first 2 points) process design aspect or operations strategy concept applicable to the question
- 4 pts Two specific process design aspects or operations strategy concepts correctly covered in the answer, with specific connections to the context of the case.
- 5 pts Appropriate tie back to the larger problems of the company.



Part 2

Propose a process design for accepting the new large-volume orders while continuing to serve the remaining customized orders customers.
Propose a process design is as follows:

          - On the same facility run job shop for high-mix, customized, and low production items and on the other hand, batch for standardized high volume items, while  minimizing change over time.

          - Without investing more on assets and labor force, adopt ‘make to stock’ for the large volume orders and then ‘make to order’ for the customized product  as appropriate.

Part 2 is worth 5 points total. Points are only given for correct/reasonable answers in the manner specified below; incorrect/unreasonable answers get zero points.

- 0 pts No answer, or irrelevant answer
- 1 pt Superficial mention of one process design aspect or operations strategy concept applicable to the question
- 2 pts One specific process design aspect or operations strategy concept correctly covered in the answer, with specific connection to the context of the case
- 3 pts Superficial mention of another (beyond the one mentioned for first 2 points) process design aspect or operations strategy concept applicable to the question
- 4 pts Two specific process design aspects or operations strategy concepts correctly covered in the answer, with specific connections to the context of the case
- 5 pts Appropriate tie back to the larger problems of the company



Part 3

Discuss other solutions for consideration that would require a shift in overall business strategy.
Settle for Standard items production while giving up on customized items:

          -Since the company has potential to fulfill large order at low price, the production line can be reconfigured to serve such purpose all things being equal.

          -Low skilled workforce can be injected into the system  to optimize output at low cost.

          -Efficiently utilize  all available resources with quality in focus for enhanced customer experience.

          -Large inventory of raw material will result in lower production cost.


Settle for customized items while trading off Standard items:

          -Optimize existing capabilities to serve your customers better.

          -Improve on job shop arrangement to engender a shorter lead time.

          -Reduces non value adding activities to enable accurate promise delivery date to customers.

          -Ensure material is always available as it is a critical factor on the job loading time and production lead time.

Part 3 is worth 5 points total. Points are only given for correct/reasonable answers in the manner specified below; incorrect/unreasonable answers get zero points.

- 0 pts No answer, or irrelevant answer
- 1 pt Superficial mention of one process design aspect or operations strategy concept applicable to the question
- 2 pts One specific process design aspect or operations strategy concept correctly covered in the answer, with specific connection to the context of the case
- 3 pts Superficial mention of another (beyond the one mentioned for first 2 points) process design aspect or operations strategy concept applicable to the question
- 4 pts Two specific process design aspects or operations strategy concepts correctly covered in the answer, with specific connections to the context of the case.
- 5 pts Appropriate tie back to the larger problems of the company
Part 1

  Discuss the causes of the current delivery date problems and the challenges in accepting the new large-volume orders with the current process design.
  
  The causes of the current delivery date problems are due to change in customer's expectations and problem in old production process which do not have provision to equip the changes in expectation. Previously the customers where expecting 1 to 5 customized sets and were willing to wait for certain amount of time. Now the no.of customized sets they are expecting is increased and they wanted the product to be delivered earlier. Also Previously the bulk orders like 20 to 50 sets were received half ordered. However, now due to the increased retail chains the bulk orders placed are doubled and they are expecting discount as they are ordering same product in bulk or high volume with earlier delivery requests.
  
  The challenges in accepting the new large-volume orders with the current process design is there is no enough automation, or not much provision to release products in batch rather than in-line and no machinery has ability to address the change in volume order production and also the employees who creates the products skill were not put in a platform to well utilize their skills in a versatile fashion.
  
Part 1 is worth 5 points total. Points are only given for correct/reasonable answers in the manner specified below; incorrect/unreasonable answers get zero points.


- 0 pts No answer, or irrelevant answer
- 1 pt Superficial mention of one process design aspect or operations strategy concept applicable to the question
- 2 pts One specific process design aspect or operations strategy concept correctly covered in the answer, with specific connection to the context of the case
- 3 pts Superficial mention of another (beyond the one mentioned for first 2 points) process design aspect or operations strategy concept applicable to the question
- 4 pts Two specific process design aspects or operations strategy concepts correctly covered in the answer, with specific connections to the context of the case.
- 5 pts Appropriate tie back to the larger problems of the company.



Part 2

  Propose a process design for accepting the new large-volume orders while continuing to serve the remaining customized orders customers.
  
  Even without giving too much specific information about how they would be arranged they can think of their manufacturing shop to be arranged in a job shop kind of environment, with different departments doing different things, as needed, for different types of designs, for different types of dining room sets. So what goes with the job shop is the idea of flexibility in volumes, and accepting changes. And then, they can also think of other features about a job shop, like skilled labor, like the idea of not thinking too much about change over times, and also the idea of being able to expand capacity in small chunks. So that would be something that they would be able to do in a job shop.

  Also the fact that now they would have to do a lot of changeovers between high volume and low volume orders would mean that the low volume orders would get stuck behind large volume orders and then the large volume orders would have to be broken up because otherwise they are keeping the low volume orders behind for a longer period of time. So there would be an increase in that sense in the number of changeovers that they would be doing. Even for the same product for a high volume order, they would have to do more changeovers. It would be definitely challenging in terms of scheduling for the same reasons

  In terms of the value of skilled labor, as they are getting orders of  increasing volume and they're trying to make more standardized stuff they have skilled labor who's talents are being wasted when they're making the same product over and over again. Very standardized product that doesn't need too much customization. So, in that sense their costs are going to remain high while the customers are asking for lower prices. And the idea of expanding capacity is very different when they think about a job shop environment, versus when they want to do it for high volume. Thinking about expanding capacity for a job shop meaning that they would have to add specialized equipment in each department if they wanted to increase the total volume. And even if they were to do that in small increments, it would turn out to be very expensive because they're not thinking of things like automation, things like taking stuff through in quick flow time. they're not going to be able to get cost effective in terms of expanding their capacity. As, the new customers are wanting high volume, lower prices and as they want discounts in their prices, and they want quick lead times.Maybe they don't have enough volume for going for a line kind of arrangement, but definitely more like a batch. More something like where they are having at least some steps that are put into a line, or a line that they are changing over between different types of products so that they can take advantage of the high volumes, and get them to flow through the process much quicker then they would in a job shop, where they would have jumbled flows. The process arrangement would be more like a batch. It would be more with longer runs. They could focus on the idea of fewer set ups and try to optimize, take that set up and that they might have and use it over a larger production run that they would do so that they are spreading that fixed cost over a larger number of units. They should be focusing on that, or Renovation should be focusing on that. They should seek opportunities for automation taking the artistic perspective out of the picture in some sense at least to some extent because customers are not demanding it. So the skilled labor coming out and the automation going in, at least for some parts of the process. They will need to be focusing more on conformance to specifications. When customers want a high volume product, they're expecting standardized product. They want product to look alike. They're going to accept orders based on something that's in the show room and then what gets delivered should be more or less similar to what they saw in the showroom. So the focus has to shift from it being creativity and making different types of units to making conforming to specifications that the customer has. And finally, they would have to give up this idea of flexibility in terms of letting customers make changes until the last minute. They would have to freeze the production schedule, otherwise, again going back to the idea of changeovers, they would be hit with a lot of changeovers. So they would have to have this idea of focusing on freezing the production schedule. And saying, look, you have to tell us in advance how many products of what kind you need. And then what would happen is that some of the customers who were earlier able to make the changes might not be happy. But this is something that they need to think about if they're going to think about serving those customers that want high volume and lower prices. 

  For good process design, One is the idea of a plant within a plant. We can have the idea of a certain part of the machine, the shop having a job shop kind of arrangement, whereas a certain part of the manufacturing shop having a batch kind of arrangement.  That gives some advantages in terms of sharing of knowledge. Need to use the job shop for customized and need to use the batch for high volume. So that would be one design, a plant within a plant kind of an arrangement. 

  Both of them are made pretty much under the same roof, but they have very distinct processes separated from each other, although, there is some sharing of knowledge and some sharing of competencies between those two processes as well. So, that would be one arrangement that they could use that they could consider if they wanted to go after both of these customer segments, go after the order winners and qualifiers of both these customer segments. 

  The second arrangement that they could have thought of is maybe think of splitting the process, So the idea of having a made to stock arrangement up to a certain extent, and then maybe continuing with a high volume for the for the standardized products and then having a job shop for the customization for the products that are going to be customized. Now this would need some type of adjustment to the expectations that the customers have, what kind of customization you would be able to offer. It should not go all the way back into the process. So they can push product all the way to a certain extent based on made to stock, or having a standardized product more like a standardized product to a certain extent. Then, from then on, getting it customized based on whatever the customer wants. So these are two possible combinations that they could have thought of and both should, in theory, be able to work if Renovation would decide to go after both types of customers. 

  So earlier when they're talking about customized product making it specifically for certain customers and having a flexible process, their purchases may not have been very high volume. They may not have thought about it too much. MRP system or an ERP system that helps them schedule better. Enterprise Resource planning system or manufacturing resource planning system that helps them plan better based on what is the demand of that parent product and breaking it down to the different sub assemblies that are needed and sending the orders out to different departments that need to make those sub assemblies so that the final product can be assembled. That's something that they would have to think about, based on this high volume market that seems to be coming up at a faster rate. Forecasting off of production volumes, what kind of volumes are they expecting would be needed in order to make investments into large volume kind of automated batch systems or line systems. They would have to at least limit the number of designs that they would offer. Based on different process arrangements based on we said either, we need to adjust the expectations of customers at least to some extent. So Renovation might have to do that to some extent. They may have to go back to the design process for designing their furniture and think about more modular designs and part commonalty. They can have certain types of assemblies, sub assemblies, in stock, that they can combine in different ways based on the orders that they get, and that they can store, that they can keep in stock whenever they have slack times from their large volume lines. 

  They can focus on reducing the changeover time. That would be useful in terms of being able to have a line that is high volume, at the same time not that inflexible in terms of changeover. And then they would also have to think about their employees in terms of the skill of the employees and what kind of skill set they would expect their employees to have. So those would be some process related decisions that they would need to make. And here they can see that these might have impact on their hiring, these might have impact on their design and R and D as well. 

Part 2 is worth 5 points total. Points are only given for correct/reasonable answers in the manner specified below; incorrect/unreasonable answers get zero points.


- 0 pts No answer, or irrelevant answer
- 1 pt Superficial mention of one process design aspect or operations strategy concept applicable to the question
- 2 pts One specific process design aspect or operations strategy concept correctly covered in the answer, with specific connection to the context of the case
- 3 pts Superficial mention of another (beyond the one mentioned for first 2 points) process design aspect or operations strategy concept applicable to the question
- 4 pts Two specific process design aspects or operations strategy concepts correctly covered in the answer, with specific connections to the context of the case
- 5 pts Appropriate tie back to the larger problems of the company



Part 3

Discuss other solutions for consideration that would require a shift in overall business strategy.
As they want to be in the market on their own terms. They could have 2 choices that they could have come up with. One is either they could focus on the customized and said this is what we're good at. and they could say that they don't really want to get into that standard product market and they will go after different customers who care about this customization. and they can move away from their current customers who are getting into high volume and go find a different a niche, a market that cares about what they are good at. So that would preserve their core competencies. They could continue to offer what they're offering, and then they would have to work with business strategy as well as their marketing strategy folks to see if that's something that everybody agrees with and that they can go after in an aligned fashion. So that would be important if they were to decide on this kind of a focus going forward. Another focus that they could have, an alternative focus, the opposite extreme of the customized would be completely give up on the customize and focus only on the standardize. So no breaking up the process as from being a job shop to a plant within a plant or combining two different types of processes but completely going after the high volume market which would require a drastic change in terms of not only the production process but also as it says here, their purchasing, their scheduling, their technology, and the people. So this would be in some sense a bigger risk getting into a market that they may not be very familiar with. But this is certainly something that they would consider as being a choice that that they have to make. 

Part 3 is worth 5 points total. Points are only given for correct/reasonable answers in the manner specified below; incorrect/unreasonable answers get zero points.


- 0 pts No answer, or irrelevant answer
- 1 pt Superficial mention of one process design aspect or operations strategy concept applicable to the question
- 2 pts One specific process design aspect or operations strategy concept correctly covered in the answer, with specific connection to the context of the case
- 3 pts Superficial mention of another (beyond the one mentioned for first 2 points) process design aspect or operations strategy concept applicable to the question
- 4 pts Two specific process design aspects or operations strategy concepts correctly covered in the answer, with specific connections to the context of the case.
- 5 pts Appropriate tie back to the larger problems of the company

Kindly refer to below answer provided by Professor.

4. Appendices

4.1 Documenting File Creation

It’s useful to record some information about how your file was created.

[1] “2016-06-18 08:40:17 JST” setting value
version R version 3.3.0 (2016-05-03) system x86_64, mingw32
ui RTerm
language (EN)
collate English_United States.1252
tz Asia/Tokyo
date 2016-06-18
sysname release version nodename “Windows” “10 x64” “build 10586” “RSTUDIO-SCIBROK” machine login user effective_user “x86-64” “scibr” “scibr” “scibr”

4.2 Versions’ Log

4.3 Speech and Blooper

Same as pevious assignment — Operations Management : Module 1 Assignment 1, I do appreciate that University of Illinois at Urbana–Champaign provides the management course via Coursera. I used to work in FujiXerox as customer service operator for one month and learnt the logistics for printer service maintanance around Taiwan province. Besides, I learnt some knowledge about sales-stocks flowchart when I work as a salesman in Maybooks few month ago. I am a newbie in marketing, cost measurement and inventory management as well as whole operating chain. Keep up learning and hope to learn some management skills and knowledges from Operations Management.

Operations Management : Module 2 Assignment 2

Operations Management : Module 2 Assignment 2

Improving Business Finances and Operations Specialization by University of Illinois at Urbana-Champaign

®γσ, Eng Lian Hu 白戸則道®

2016-06-08

1. Introduction

Instructions

The purpose of this assignment is to give you the opportunity to apply the concepts you have learned in this module and to discuss some of the key ideas of the module in your own words. Follow the instructions provided and respond to each question. This a required activity for this module.

Submit your answers to each of the questions based on the information provided below. Enter your answers directly in the spaces provided in the My submission tab. You may save a draft of your work as you go, and you can come back later to continue working on your draft. When you are finished working, click the Preview button, verify your identity, and then click Submit for review to submit the assignment. Please answer each question fully and concisely.

The discussion of the assignment solution is provided in the Module 2 Assignment 2 Solution video. Do the assignment on your own first, before viewing the assignment discussion video!

Watches Assembly

Watches Assembly

Figure 1.1 : Assembly watches

From above picture, we try to categorize 5 workstations to assembly a complated watch. For example:

  • 1st Workstation : Assembly the accessory part for clock.
  • 2nd Workstation : Assembly the electronic board.
  • 3rd Workstation : Assembly the electrical conductor.
  • 4th Workstation : Assembly the device cover.
  • 5th Workstation : Assembly the belt of the watch.

2. Operational Concepts

Part 1

A line for final assembly of watches has 5 workstations with equal amount of work for the single worker at each station. The workers sit next to each other passing each watch to the worker at the next station as they are done. The workers are paid $15 per hour for the normal 7 hours of work per day. The line normally completes 300 watches per day.

When everything works as planned (no errors and breakdowns) completing the expected daily quantity, what is the implied cycle time at each workstation?

\[Ws = 5, Hrs = 7, Py = $15, Wc = 300\] \[Paid / unit = (Ws \times Hrs \times Py) / Wc\] \[Productivity / dollar = Wc / (Ws \times Hrs \times Py)\] \[Productivity / hour = Wc / (Ws \times Hrs)\] \[Paid / cycle = Hrs \times Py\] \[Productivity / cycle = Wc / (Ws \times Hrs)\]

Category Figure
Paid per Unit 1.7500000
Productivity per dollar 0.5714286
Productivity per hour per workstation 8.5714286
Paid per hour per cycle 75.0000000
Paid per day per workstation 105.0000000
Paid per day 525.0000000
Productivity per hour per cycle 42.8571429
Cycle time per unit 0.0233333
Productivity per workstation per day 60.0000000

Table 2.1 Summarise table for productivity cycle.

  • From above table, we can know that the wager per unit watch produced will be $1.75 without any idle time.
  • The productivity rate for every dollar paid is 0.5714286, which is every single dollar paid to each workstation will produce 57.14% of a complated unit watch.
  • Assume that the average of the productivity across 5 workstations are equally, the productivity per hour per workstation means 8.5714286 unit of watch for a workstation will be partly assembly.
  • Paid per hour per cycle is the wager paid for 5 workstation per hour which is $75. To know the wager paid for 5 workers per day will be $525. Meanwhile, Paid for a worker per day is $105.
  • Productivity per hour per cycle is the 42 units of completed unit watches and 86% of a partially assemblied unit of watch will be made per hour.
  • Productivity per workstation per day is the 60 units of partially assemblied watch made by a worker within a day.
  • Cycle time is the time cosuming to produce a unit watch which is 1 minute 24 seconds.

Part 2

What is the total labor cost of assembly per watch when everything works as planned (no errors and breakdowns) completing the expected daily quantity?

  • $1.75 is the labor cost for assembly one watch.

Part 3

If the utilization for the line drops to 90% due to unplanned occurrences, how much extra time would be needed to complete the routine daily quantity of watches? Referring to Part 5 may help you address this question.

  • If the production reduce to 90%, then 270 completed unit of watches will be produced per day. Therefore additional productivity hour of 46 minutes 40 seconds required in order to completed 300 units per day.
  • The labor cost per unit will be increased 11.11% to $1.94 since the productivity decreased 10% to 90%.
  • The productivity per hour per cycle decreased to be 38 units of completed unit watches and 57% of a partially assemblied unit of watch will be made per hour.

Part 4

The workers are paid a 50% premium for overtime work for up to 2 extra hours per day and which can be quantified in fractions of hours. What would be the total labor cost per unit based on completion of 300 units and including the overtime costs?

\[Overtime Paid / hour = 1.5 \times Wager\] \[Wager / worker / day = 7 hours \times wager + overtime \times overtime wager\]

  • additional 50% of paid for overtime which is $22.5 per hour. Therefore additional paid for 5 workers for 46 minutes 40 seconds will be $87.5 per day.
  • Since 7 hours only able to produce 270 units. The total paid for 5 workers per day will be $612.5 compre to initial $525 to completed 300 units within a day.
  • The labor cost per unit is $2.04 and 117% of initial $1.75.

Part 5

Please list at least one critical assumption that is necessary in computing the additional time and cost.

\[Max Wager / worker / day = 7 hours \times wager + 2 hours \times overtime wager\]

  • Let’s assume that the 300 units completed within 9 hours per day. Therefore the productivity time is now 7 hours normal working hours plus 2 hours overtime. ovetime paid $45 + $105 = $150 for one worker. The total pay will be $750 per day.
  • The labor cost per unit will be $2.5 since 9 hours productivity hours needed to complete assembly 300 units compare to before 7 hours 46 minutes 40 seconds.

3. Conclusion

I tried to write my answer above based on my understanding on the assignment prior to watch below video. I do say sorry since my Enlish language is not good.

From the observation above, we can conclude that lower productivity efficiency will increase the labor cost.

Below is the answer from my peer while I am not unserstand why The overtime = (42/60)hrs = 0.7hrs?

Process metrics/cost implication

Part 1

A line for final assembly of watches has 5 workstations with equal amount of work for the single worker at each station. The workers sit next to each other passing each watch to the worker at the next station as they are done. The workers are paid $15 per hour for the normal 7 hours of work per day. The line normally completes 300 watches per day.

When everything works as planned (no errors and breakdowns) completing the expected daily quantity, what is the implied cycle time at each workstation?
Solution:

All things being equal, the implied cycle time is thus calculated:-

CT=1/R

Where CT = Cycle or process time    ||   R= Flow rate

Then R= 300/(7*60)

Therefor CT= 7*60/300 = 1.4 Min.


Part 2

What is the total labor cost of assembly per watch when everything works as planned (no errors and breakdowns) completing the expected daily quantity?
Solution:

Pay for one (1) worker per day = 15*7 = $105

Total pay for five (5) workers per day = 105 * 5=$525

Total labor cost of assembly per watch= 525/300 = $1.75


Part 3

If the utilization for the line drops to 90% due to unplanned occurrences, how much extra time would be needed to complete the routine daily quantity of watches? Referring to Part 5 may help you address this question.

Solution:

300 watches per day (7hrs) at 100% utilization.

At 90 % utilization, we have 90/100 * 300 = 270 watches

Time to produce 30 (300-270) watches = 30/300 * 420 = 0.1 * 420 = 42 Min    or   0.7hrs


Part 4

The workers are paid a 50% premium for overtime work for up to 2 extra hours per day and which can be quantified in fractions of hours. What would be the total labor cost per unit based on completion of 300 units and including the overtime costs?
Solution:

The overtime =  (42/60)hrs = 0.7hrs

Overtime pay for one (1) worker at 100% utilization

 = (0.7 *15) + (0.7 *15 * 50/100) = 10.5 + 5.25 = $15.75

Total overtime paid to 5 workers = 15.75 * 5 = $78.75

Therefore, be the total labor cost per unit based on completion of 300 units and including the overtime costs 

= (525 + 78.75)/300 = 603.75 /300 = $2.0125

Is the correct answer given?


Part 5

Please list at least one critical assumption that is necessary in computing the additional time and cost.
100% utilization during overtime all things being equal.

Kindly refer to below answer provided by Professor.

4. Appendices

4.1 Documenting File Creation

It’s useful to record some information about how your file was created.

[1] “2016-06-08 01:00:31 JST” setting value
version R version 3.3.0 (2016-05-03) system x86_64, mingw32
ui RTerm
language (EN)
collate English_United States.1252
tz Asia/Tokyo
date 2016-06-08
sysname release version nodename “Windows” “10 x64” “build 10586” “RSTUDIO-SCIBROK” machine login user effective_user “x86-64” “scibr” “scibr” “scibr”

4.2 Versions’ Log

4.3 Speech and Blooper

Same as pevious assignment — Operations Management : Module 1 Assignment 1, I do appreciate that University of Illinois at Urbana–Champaign provides the management course via Coursera. I am a newbie in marketing, cost measurement and inventory management as well as whole operating chain. Keep up learning and hope to learn some management skills and knowledges from Operations Management.

4.4 References

Operations Management : Module 3 Assignment

Operations Management : Module 3 Assignment

Improving Business Finances and Operations Specialization by University of Illinois at Urbana-Champaign

®γσ, Eng Lian Hu 白戸則道®

2016-06-11

1. Introduction

1.1 Instructions

Instructions

The purpose of this assignment is to give you the opportunity to apply the concepts you have learned in this module and to discuss some of the key ideas of the module in your own words. Follow the instructions provided and respond to each question. This a required activity for this module.

Submit your answers to each of the questions based on the information provided below. Enter your answers directly in the spaces provided in the My submission tab. You may save a draft of your work as you go, and you can come back later to continue working on your draft. When you are finished working, click the Preview button, verify your identity, and then click Submit for review to submit the assignment. Please answer each question fully and concisely.

1.2 Summary

The discussion of the assignment solution is provided in the Module 3 Assignment Solution video. Do the assignment on your own first, before viewing the assignment discussion video!

Bintu Fehrenbacher owns five kiosks in the Mall of America in Minneapolis, Minnesota. Every 13 weeks, she orders 2,600 smartphones for combined sales in her kiosks. She has recorded weekly sales for the last two years (52 weeks per year), and this data is available to you in the following table. Bintu incurs a cost of $200 every time she places an order. Her average cost of each smartphone is $50. Her cost of capital is 11%. She incurs an additional insurance cost of 1 cent per week for every phone in inventory.

Data for two years (also available in the Module3_Assignment_Data.xlsx spreadsheet):

Table 1.2.1 : Weekly sales table of Bintu Fehrenbacher’s kiosks.


Graph 1.2.1 : Weekly sales graph of Bintu Fehrenbacher’s kiosks.

2. Operational Concepts

Part 1

Based on Bintu’s ordering policy, what is her total annual cost associated with inventory?

Annual Total Summary

Week Year.Before.Last Last.Year Sess Insurance
52 10400 10400 All 0.52

Table 2.1.1 : Annual Summary

Below is a table which breakdown the seasonal orders which are 13 weeks once.

Table 2.1.2 : Sessonal Summary

\[total\ annual\ cost = orderding\ cost + inventory\ holding\ cost + insurance\ cost\]

Equation 2.1.1 : Economic Order Quantity (EOQ)

Equation 2.1.1 : Economic Order Quantity (EOQ)

  • Q = 2600 Units per season/order/lot.
  • H = The everage cost of a smartphone is $50, additional 11% and weekly $0.01 insure cost. Therefore the holding cost per unit is $6.02.
  • D = 10400 units where 52 Weeks ÷ 13 Weeks = 4 seasons/orders/lots per year.
  • S = $200 cost per season/lot/order, then annual ordering cost will be $800.
  • Weekly insurance is 0.01, then annual insurance will be $0.52.

\[C = \frac{2,600 units}{2}(\$50 \times 11\% + \$0.01 \times 52 weeks) + \frac{10,400 units}{2,600 units}(\$200)\]

Therefore annual cost (exclude other cost which has not given in the question) will be $8626. You can using calculator for inventory cost via Total Inventory Cost.

Part 2

Compute the EOQ.

What is an ‘Economic Order Quantity - EOQ’?

An economic order quantity (EOQ) is an inventory-related equation that determines the optimum order quantity that a company should hold in its inventory given a set cost of production, demand rate and other variables. This is done to minimize variable inventory costs. The full equation is as follows:

Economic Order Quantity (EOQ)

\[EOQ = \sqrt{\frac{2SD}{PI}}\]

where :

  • S = Setup costs
  • D = Demand rate
  • P = Production cost
  • I = Interest rate (considered an opportunity cost, so the risk-free rate can be used)

Equation 2.2.1 : Economic Order Quantity (EOQ)

Read more: Economic Order Quantity (EOQ) Definition | Investopedia

You can also read ECONOMIC ORDER QUANTITY (EOQ) MODEL: Inventory Management Models : A Tutorial with example to know that cost of product is not in count.

Equation 2.2.2 : Economic Order Quantity (EOQ)

Equation 2.2.2 : Economic Order Quantity (EOQ)

  • A = Demand for the year
  • Cp = Cost to place a single order
  • Ch = Cost to hold one unit inventory for a year

Now we try to given the value for every single parameter/variable.

  • Cost of holding a unit is $6.02.
  • S = $200
  • D = 10400 annual sales
  • P = 50 x 11% = $5.5
  • I = $0.01 x 52 weeks = $0.52

The optimal order quantity is EOQ = 831.2820823 units.

Part 3

What is her total annual cost associated with inventory using EOQ?

Total Relevant Cost (TRC)

\[Total\ Relevant\ Cost\ (TRC) = Yearly\ Holding\ Cost + Yearly\ Ordering\ Cost\]

Equation 2.3.1 : Total Relevant Cost

Equation 2.3.1 : Total Relevant Cost

Graph 2.3.1 : What would holding and ordering costs look like for the years?

Graph 2.3.1 : What would holding and ordering costs look like for the years?

  • A = Demand for the year
  • Cp = Cost to place a single order
  • Ch = Cost to hold one unit inventory for a year
  • Q = Quantity/size per order

** Relevant because they are affected by the order quantity Q

  • Yearly holding cost = $6.02 x 831 units ÷ 2 = $2501.31.
  • Yearly ordering cost = 10400 units ÷ 831 units x $200 = $2502.16.

Total Relevant Cost (TRC) = $5003.47

Where you can refer to Economic Order Quantity Models for more details.

Part 4

If there is a lead time of two weeks for smartphones, and given that the standard deviation of demand is 29, what would be the reorder point for a cycle service level of 90% (safety stock service factor = 1.28) using the continuous review inventory management system?

Graph 2.4.1 : Sample of reorder point

Graph 2.4.1 : Sample of reorder point

Graph 2.4.2 : Sample of reorder point calculation

Graph 2.4.2 : Sample of reorder point calculation

Equation 2.4.1 : reorder point

Equation 2.4.1 : reorder point

  • Average weekly demand = 2600 units ÷ 13 weeks = 200 units.
  • Lead time = 2 weeks
  • Standard deviation of demand = 29
  • Standard deviation to service level probability = 1.28

R = 452.4956074 units.

Part 5

State the decision rules for Bintu if she now follows a continuous review inventory policy based on your computations.

Bintu should reorder (EOQ) 831 units when the stocks balance reach (ROP) 452 units.

3. Conclusion

Base from the dataset which we initially don’t know the stocks balance, however we measure the optimal reorder point as well as the reorder size for Bintu.

4. Appendices

4.1 Documenting File Creation

It’s useful to record some information about how your file was created.

[1] “2016-06-11 03:08:28 JST” setting value
version R version 3.3.0 (2016-05-03) system x86_64, mingw32
ui RTerm
language (EN)
collate English_United States.1252
tz Asia/Tokyo
date 2016-06-11
sysname release version nodename “Windows” “10 x64” “build 10586” “RSTUDIO-SCIBROK” machine login user effective_user “x86-64” “scibr” “scibr” “scibr”

4.2 Versions’ Log

4.3 Speech and Blooper

Same as pevious assignment — Operations Management : Module 1 Assignment 1, I do appreciate that University of Illinois at Urbana–Champaign provides the management course via Coursera.

I initially don’t know how to calculate the reorder point and reorder size from the video solution. However I had searched and read the relevant articles to know the concepts and the formulas. I am a newbie in marketing, cost measurement and inventory management as well as whole operating chain. Keep up learning and hope to learn some management skills and knowledges from Operations Management.

  • mPlot(x = 'Week', y = c('Year Before Last', 'Last Year'), type = 'Line', data = dat) facing connection error to read the data with RMarkdown but working fine if run via chunk.
  • googleVis::gvisLineChart() only shows Edit me! but no graph.

Operations Management : Module 4 Assignment

Operations Management : Module 4 Assignment

Improving Business Finances and Operations Specialization by University of Illinois at Urbana-Champaign

®γσ, Eng Lian Hu 白戸則道®

2016-06-13

1. Introduction

1.1 Instructions

Instructions

The purpose of this assignment is to give you the opportunity to apply the concepts you have learned in this module and to discuss some of the key ideas of the module in your own words. Follow the instructions provided and respond to each question. This a required activity for this module.

Submit your answers to each of the questions based on the information provided below. Enter your answers directly in the spaces provided in the My submission tab. You may save a draft of your work as you go, and you can come back later to continue working on your draft. When you are finished working, click the Preview button, verify your identity, and then click Submit for review to submit the assignment. Please answer each question fully and concisely.

The discussion of the assignment solution is provided in the Module 4 Assignment Solution video. Do the assignment on your own first, before viewing the assignment discussion video!

For this assignment you will need the data in these spreadsheets:

1.2 Summary

Customers of Health Freaks Natural Foods Supplies have recently complained about underweight bags of their breakfast cereal. The 500-gram bags are manually filled at the end of the mixing line using a pourer and an electronic weighing scale that adjusts for the empty weight of the super thick bags made from biodegradable natural material used for the packaging. The quality control manager for the plant, Jim Stokowski, has begun looking into the issue. He has collected data from the filling process over five days.

For each of the two shifts that the line is in operation, Jim has sampled ten bags each at five regular intervals; so, \(5 days \times 2 shifts \times 5 sampling times \times 10 bags\). As Jim did not want to rule out any potential factor including variation in weight of empty bags as an issue at this stage of his investigation, he carefully weighed just the cereal after tearing open the bags and recorded the data. For each of the fifty 10-bag samples, Jim computed the sample-average and recorded the smallest and largest values in each sample.

That data is located in the Module4_Assignment_Table1.xlsx spreadsheet. The raw data from which these averages and sample-smallest and largest values were extracted are also available to you in the Module4_Assignment_RawData.xlsx spreadsheet. Jim’s hunch is that the more recently started second shift may have some issues.

Based on this data, for Parts 1-4, please check whether the process is in statistical control, computing the limits for R and X-bar charts for shift 1 and shift 2 (control chart constants for R and X-bar charts are provided in in the Module4_Assignment_Table2.xlsx spreadsheet) and comparing the sample averages and ranges for each shift with their respective limits. You need not draw the two sets of R and X-bar control charts.

Then, for Part 5, based on the information that you have here and your data analysis, how would you characterize the performance of the process in the two shifts, and what would you do next?

Table 1.2.1 : Daily data of the weight of breakfast cereal.

Table 1.2.2 : R Chart and X-bar of the weight of breakfast cereal.

Table 1.2.3 : Control chart of the weight of breakfast cereal.

Table 1.2.4a : Data summary of daily weight control

Table 1.2.4b : Data summary of daily weight control

Graph 1.2.1 : Data plot of the observations.

Graph 1.2.2 : Data plot of the observations.


Graph 1.2.3 : R and X-bar control charts.

You can casually change above chart type by click the Edit Me!.

2. Operational Concepts

Part 1

Compute the limits for the R chart for shift 1. Interpret the control chart by comparing the sample ranges to the control limits.

Table 2.1.1 : Data summary of R and X-bar control charts.

\[Center Line (Shift 1) = \sum_{i=1,2..}^{n}\frac{Largest_{i} - Smallest_{j}}{n}\]

Therefore, the Center Line for Shift 1 = 34.6576 grams. The article mentions that 10-bag samples per sampling1 For the daily sample size, you can see from Table 1.2.1 has column X1 until X10. total sample size \(n\), you can just subset/filter the column Shift inside Table 1.2.1 and Table 1.2.2 which is (5 times sampling per day * 5 weekdays) 25 observations., therefore :

Table 2.1.2 : 10 sample size of LCL and UCL.

  • Upper Control Limit = Factor.for.UCL.for.R.(D4) x center line = 61.5865552
  • Lower Control Limit = Factor.for.LCL.for.R.(D3) x center line = 7.7286448

Here we summarise it as 34.6576 grams is the center line for total 25 sample size and the weight range will falling between 7.7286448 grams and 61.5865552 grams.

Part 2

Compute the limits for the R chart for shift 2. Interpret the control chart by comparing the sample ranges to the control limits.

By refer to above Table 2.1.1 and Table 2.1.2, we know that :

  • Center Line = 34.4916
  • Upper Control Limit = Factor.for.UCL.for.R.(D4) x center line = 61.2915732
  • Lower Control Limit = Factor.for.LCL.for.R.(D3) x center line = 7.6916268

Therefore we conclude that based on the 25 sample size, Center Line for Shift 2 = 34.4916 grams and the weight of cereal bags are vary within the range 7.6916268 grams to 61.2915732 grams.

Part 3

Compute the limits for the X-bar chart for shift 1. Interpret the control chart by comparing the sample means to the control limits.

  • Mean of Means = 500.2244
  • Center Line = 34.6576
  • Upper Control Limit = Mean of Means + Factor.for.X-bar.(A2) x center line = 510.8989408
  • Lower Control Limit = Mean of Means - Factor.for.X-bar.(A2) x center line = 489.5498592

The average of weight of all 25 samples will be 500.2244 grams and from the lowest 489.5498592 grams to the higest 510.8989408 grams.


Graph 2.3.1 : Weights of cereal bags.

Base from Graph 2.3.1, we observed the average and the range of cereal bags’s weights. From Table 1.2.1 we can count that 178 among 300 samples have lower weight than center line.

Part 4

Compute the limits for the X-bar chart for shift 2. Interpret the control chart by comparing the sample means to the control limits.

  • Mean of Means = 481.796
  • Center Line = 34.4916
  • Upper Control Limit = Mean of Means + Factor.for.X-bar.(A2) x center line = 492.4194128
  • Lower Control Limit = Mean of Means - Factor.for.X-bar.(A2) x center line = 471.1725872

The average of weight of all 25 samples will be 481.796 grams and from the lowest 471.1725872 grams to the higest 492.4194128 grams.

Base from Graph 2.3.1, we observed the average and the range of cereal bags’s weights. From Table 1.2.1 we can count that 166 among 300 samples have lower weight than center line.

Part 5

Based on the information that you have here and your data analysis, how would you characterize the performance of the process in the two shifts, and what would you do next?

From Table 2.1.1, we can observe that the ranges of both shift 1 and also shift 2 are almost similar but they are quite high which are 6.9284105 and 7.1589635. However shift 2 has 7.1589635 different range base on mean value 481.796 is consider greater under-fills compare to shift 1.

3. Conclusion

As concluded in Part 5, from Table 2.1.1, we can observe that the ranges of both shift 1 and also shift 2 are almost similar but they are quite high which are 6.9284105 and 7.1589635. However shift 2 has 7.1589635 different range base on mean value 481.796 is consider greater under-fills compare to shift 1.

4. Appendices

4.1 Documenting File Creation

It’s useful to record some information about how your file was created.

[1] “2016-06-13 02:02:01 JST” setting value
version R version 3.3.0 (2016-05-03) system x86_64, mingw32
ui RTerm
language (EN)
collate English_United States.1252
tz Asia/Tokyo
date 2016-06-13
sysname release version nodename “Windows” “10 x64” “build 10586” “RSTUDIO-SCIBROK” machine login user effective_user “x86-64” “scibr” “scibr” “scibr”

4.2 Versions’ Log

4.3 Speech and Blooper

Same as pevious assignments in Operations Management, I do appreciate that University of Illinois at Urbana–Champaign provides the management course via Coursera.

I initially don’t know how to calculate the reorder point and reorder size from the video solution. However I had searched and read the relevant articles to know the concepts and the formulas. I am a newbie in marketing, cost measurement and inventory management as well as whole operating chain. Keep up learning and hope to learn some management skills and knowledges from Operations Management.

  • Graph 1.2.1 and Graph 1.2.2 which plot by using rCharts::nPlot() and rCharts::hPlot() occurred some unonymous errors since it is working fine if run via chunk but show nothing when knitted.
  • googleVis::gvisLineChart() only shows Edit me! but no graph in local but published is working fine.

4.4 References

Financial Evaluation and Strategy: Corporate Finance : Module 1

Financial Evaluation and Strategy: Corporate Finance : Module 1

Improving Business Finances and Operations Specialization by University of Illinois at Urbana-Champaign

®γσ, Eng Lian Hu 白戸則道®

2016-07-16

1. Introduction

1.1 Overview

The purpose of this assignment is to give you the opportunity to apply the concepts you have learned in this module and to discuss some of the key ideas of the module in your own words. Follow the instructions provided and respond to each question. This a required activity for this module. The activity is peer reviewed, so after you submit your responses, you will review submissions by fellow learners in the course.

1.2 Review criteria

For Assignment #1, you will be responsible for evaluating the submissions of THREE of your peers. Before evaluating, please see the video I prepared with my discussion of the answers to Assignment #1.

Assignment #1 is worth 100 points total. Points are only given for correct/reasonable answers in the manner specified below, incorrect/unreasonable answers get zero points. Points should be allocated as follows:

Question 1

  • 10 points for a reasonable answer that is based on the arguments that we discussed in the lectures
  • 5 points for an incomplete answer or a correct answer that is too long (longer than 1 paragraph)

Question 2

  • 10 points for correctly identifying the package that is most likely to lead to shareholder value maximization and a reasonable explanation based on the arguments we discussed in the lectures
  • 5 points for choosing the wrong compensation package but justifying the choice with a reasonable argument, or for a correct answer that is too long (longer than 1 paragraph)
  • 2 points for correctly identifying the package but including no explanation

Question 3

  • 10 points for the correct liquidity ratios for all years and both companies
  • 5 points for an answer that is partially correct, for example not calculating the ratios for all years, or making a mistake on one of the ratios.

Question 4

  • 10 points for the correct leverage ratios for both companies
  • 5 points for an answer that is partially correct, for example not calculating all the leverage ratios, or making a mistake on one of the ratios.

Question 5

  • 10 points for the correct profitability ratios for all years and both companies
  • 5 points for an answer that is partially correct, for example not calculating the ratios for all years, or making a mistake on one of the ratios.

Question 6

  • 10 points for the correct cash profitability ratios for all years and both companies
  • 5 points for an answer that is partially correct, for example not calculating the ratios for all years, or making a mistake on one of the ratios.

Question 7

  • 10 points for the correct analysis of the cash flow statement for both companies
  • 5 points for an answer that is partially correct, for example making a mistake on the analysis of investment cash flows

Question 8

  • 10 points for the correct valuation ratios for both companies
  • 5 points for an answer that is partially correct, for example not calculating all the valuation ratios, or making a mistake on one of the ratios.

Question 9

  • 20 points for a well justified comparison of both companies that is based on the results of questions 3 to 8
  • 10 points for a reasonable but incomplete answer, for example not discussing one of the aspects such as valuation or profitability.

Recommendations for Fair Peer Review:

  • For questions that require calculations only, the score should be based on whether or not the answer provided is correct.
  • For subjective questions, the score should not be based on whether or not you agree with the answer, rather on whether the answer is complete and well-supported.
  • Both content and organization are important components of a response. Good writing is confident and clearly focused with relevant details to enrich the content. Good writing also follows instructions, such as word limits, and offers requested information.
  • A clear and concise answer is preferable to a long response that lacks coherence. Focus should be on content; try not to unduly penalize responses for spelling or grammar.

1.3 Instructions

There are multiple steps to this assignment.

First, you will submit your answers to each of the 9 questions based on the information in the Assignment Details section. Enter your answers directly in the spaces provided in the My submission tab. You may save a draft of your work as you go, and you can come back later to continue working on your draft. When you are finished working, click the Preview button, verify your identity, and then Submit the assignment. Please answer each question fully and concisely.

Then, you will evaluate the submissions of at least THREE of your peers based on the instructions provided. You may begin giving feedback to other students as soon as you submit your assignment, click the Review peers tab to begin. Feel free to provide additional reviews beyond the three required!

Assignment 1 is described in Video Lesson 1-10, you should watch this video before doing the assignment.

For questions 3-9 you will need data from the Nike Inc and V.F. Corporation spreadsheets.

table 1.3.1: Financial statement of stock counter NKE.

table 1.3.2: Financial statement of stock counter VFC.

The discussion of the assignment solution is provided in Video Lesson 1-11. Do the assignment on your own first, before viewing the assignment discussion video! Please view the assignment discussion video before completing the review of your peers.

1.4 Reminders

1.4.1 Using the Forums

Your fellow students are a great resource, and we encourage you to sharpen your ideas against them in the forums. You can post your arguments in the Module 1 Forum and receive feedback before submitting this assignment. Additionally, make sure to pay attention to posts from the instructors, which are intended to spur conversation on topics related to the week’s theme.

1.4.2 Honor Code

Please remember that you have agreed to the Honor Code, and your submission should be entirely yours. Our definition of plagiarism follows from standard literature: passing off someone else’s work as your own, whether from your peers or Wikipedia. If you need to quote material, remember to cite your source, for example: “But, as expressed by Spinoza, all things excellent are as difficult as they are rare (Baruch Spinoza,”Ethica" source: thinkexist.com)."

2. Case Study

2.1 Question 1

  Explain why maximizing current stockholder wealth is a reasonable objective for the corporation (1 paragraph maximum).
  • Stockholder/shareholder invest the money on a corperate and expect the management growth the corperate to generate profit.
  • Due to the income of the corperate is generated by staffs since shareholder cannot spend thier time to oversee the operation of a corperate, therefore they hire/appoint a team of management to lead or manage the corperate.
  • Shareholders hold the right to sake the management team anytime if the management unable hit the target or vision expected by shareholders.
  • A corperate especially a public listed company need to acquire/inject fund from the stock market, the shareholders expected the company can growth and willing to invest. The performance of the management will be evaluate by the shareholders as well. Management level can be dictator only who hold a majority portion of shares and contribute a lot to the corperate. For example, Steve Jobs, Larry Ellison, Bill Gates, Mark Zuckerberg are the soul of their own corperate.

2.2 Question 2

  A company’s board of directors must choose between two alternative compensation packages for top executives. Package 1 includes a fixed salary and an yearly bonus that depends on profits on that year. For example, the CEO gets paid a bonus if profits are higher than a certain target. Package 2 includes a fixed salary, and a certain amount of stock in the company. Which package is likely to be better from the point of view of shareholder value maximization? (1 paragraph maximum).
  • Package 1: Normally high salary paid to board of directors can stimulate them to growth the business group since high revnecue and also profit made by the group, the board of directors will also get higher paid.
  • However, there has pro and con since fixed salary will induce low quality and inefficiency of the board of directors becasue the salary might not affected by the revenue and also profit made by the group.
  • Normally a small and medium conservative busissness group do not take the high risk will offer the package 1. Some companies with a stable and certain business income might also offer package 1.

  • Package 2: A large and also some aggresive busissness group normally will offer a certain amount of stock of the company to the board of directors. The board of director will be stimulated and more loyal to growth the business group.
  • However the stress given by shareholders to the board of directors will also be high accordingly. The risk of saking is also high since the shareholders provide the rumination pay and expect the board of directors to join the big family, stand with shareholders (same objective and profit sharing from the stocks awarded by shareholders) and struggle and sincerely to growth the business group. You can refer to below articles:
  • Comparison: package 1 might efficient within short-term period (might be 3 to 5 years or 8 to 10 years) due to high paid, however package 2 might probably get loyalty of board of directors who will stay and growth with the business group long life (might probably 30 to 50 years).
  • For example, not only Ladbrokes, William Hill prefer package 2… Maxbet, SBOBet and Crown offer package 2 to the management level and most of them work more than 10 to 20 years compare to William Hill and Ladbrokes.

2.3 Question 3

  Questions 3-9 will ask you to compute, compare, and analyze financial ratios for Nike Inc and V.F. Corporation. The data you need are in the linked spreadsheets.

  Here is some information about the companies from Capital IQ :

  NIKE, Inc., together with its subsidiaries, designs, develops, markets, and sells athletic footwear, apparel, equipment, and accessories for men, women, and kids worldwide. NIKE, Inc. was founded in 1964 and is headquartered in Beaverton, Oregon.

  V.F. Corporation was founded in 1899 and is headquartered in Greensboro, North Carolina. V.F. Corporation designs, manufactures, markets, and distributes branded lifestyle apparel, footwear, and accessories in the United States and Europe.

  Compute the main liquidity ratios for both Nike and V.F.Corporation (current ratios, quick ratios, and cash ratios). Do this for the last 3 years available. For Nike they will be May 2015, May 2014 and May 2013. For V.F.Corporation they will be July 2015 (latest-twelve months), January 2015, and December 2013.

table 2.3.1: Current ratio of stock NKE.

table 2.3.2: Current ratio of stock VFC.

What is the ‘Current Ratio’?

The current ratio is a liquidity ratio that measures a company’s ability to pay short-term and long-term obligations. To gauge this ability, the current ratio considers the current total assets of a company (both liquid and illiquid) relative to that company’s current total liabilities.

The formula for calculating a company’s current ratio, then, is:

\[Current\ Ratio = Current\ Assets / Current\ Liabilities\]

The current ratio is called “current” because, unlike some other liquidity ratios, it incorporates all current assets and liabilities.

You can refer to What is the ‘Current Ratio’ for further details.

What is the ‘Quick Ratio’?

The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets. For this reason, the ratio excludes inventories from current assets, and is calculated as follows:

\(Quick\ ratio = (current\ assets – inventories) / current\ liabilities\), or \(Quick\ ratio = (cash\ and\ equivalents + marketable\ securities + accounts receivable) / current\ liabilities\)

The quick ratio measures the dollar amount of liquid assets available for each dollar of current liabilities. Thus, a quick ratio of 1.5 means that a company has $1.50 of liquid assets available to cover each $1 of current liabilities. The higher the quick ratio, the better the company’s liquidity position. Also known as the “acid-test ratio” or “quick assets ratio.”

Read more: Quick Ratio Definition | Investopedia

Liquidity Measurement Ratios: Cash Ratio

The cash ratio is an indicator of a company’s liquidity that further refines both the current ratio and the quick ratio by measuring the amount of cash, cash equivalents or invested funds there are in current assets to cover current liabilities…

Very few companies will have enough cash and cash equivalents to fully cover current liabilities, which isn’t necessarily a bad thing, so don’t focus on this ratio being above 1:1…

  • Liquidity Measurement Ratios: Introduction
  • Liquidity Measurement Ratios: Current Ratio
  • Liquidity Measurement Ratios: Quick Ratio
  • Liquidity Measurement Ratios: Cash Ratio
  • Liquidity Measurement Ratios: Cash Conversion Cycle

Read more: Liquidity Measurement Ratios: Cash Ratio | Investopedia

Comparison

When we compare the liquidity of both companies from table 2.3.1 and table 2.3.2: - Current Ratio: The current ratio of both companies are consider healthy since greater than 1. However we can know from the assets and liabilities and know that the assets and liabilities of NKE is increasing over the years but VFC reduced in assets but increase in liabilities. It might indicate VFC sold some assets to settle the debts and the company size is shrinking. - Quick Ratio: The quick ratio of NKE is greater than 1 but VFC faced liquidity problem in year 2015. - Cash Ratio: The cash ratio of NKE is around 1 indicates it is a healthy company but VFC has insufficient cash to cover liabilities but that is consider a normal phenomena.

2.4 Question 4

  Compute the main balance sheet leverage ratios for both Nike and V.F.Corporation (Debt/(Debt + Equity), and Liabilities/Assets). You only need to do this using the most recently available data so as to reflect the current valuation of the companies.


\[\frac{Debt}{Debt + Market\ Value\ of\ Assets} \cdots equation\ 2.4.1\]
\[\frac{Total\ Liabilities}{Market\ Value\ of\ Assets} \cdots equation\ 2.4.2\]
\[Market\ Value\ of\ Assets = Market\ Value\ of\ Equity + Total\ Liabilities \cdots equation\ 2.4.3\]

table 2.4.1A: Key stats of stock counter NKE.

table 2.4.1B: Main balance sheet of stock counter NKE.

  • Market Value of Equity: $95572.06 (Jul-27-2015)
  • Market Value of Assets: $104465.06 (Jul-27-2015)

table 2.4.2A: Key stats of stock counter VFC.

table 2.4.2B: Main balance sheet leverage ratios of stock counter VFC.

  • Market Value of Equity: $31732.88 (Jul-23-2015)
  • Market Value of Assets: $36674.59 (Jul-23-2015)

Understanding Leverage Ratio

While some businesses pride themselves on being debt-free, most companies have had to borrow at one point or another to buy equipment, build new offices or cut payroll checks. For the investor, the challenge is determining whether the organization’s debt level is sustainable.

Is having debt, in and of itself, harmful? Well, yes and no. In some cases, borrowing may actually be a positive sign. Consider a company that wants to build a new plant because of increased demand for its products. It may have to take out a loan or sell bonds to pay for the construction and equipment costs, but it’s expecting future sales to more than make up for any associated borrowing costs. And because interest expenses are tax-deductible, debt can be a cheaper way to increase assets than equity.

The problem is when the use of debt, also known as leveraging, becomes excessive. With interest payments taking a large chunk out of top-line sales, a company will have less cash to fund marketing, research and development and other important investments.

Large debt loads can make businesses particularly vulnerable during an economic downturn. If the corporation struggles to make regular interest payments, investors are likely to lose confidence and bid down the share price. In more extreme cases, bankruptcy becomes a very real possibility.

For these reasons, seasoned investors take a good look at liabilities before purchasing corporate stock or bonds. As a way to quickly size up businesses in this regard, traders have developed a number of ratios that help separate healthy borrowers from those swimming in debt.

Debt and Debt-to-Equity Ratios

Two of the most popular calculations, the debt ratio and debt-to-equity ratio, rely on information readily available on the company’s balance sheet. To determine the debt ratio, simply divide the firm’s total liabilities by its total assets:

\[Debt\ Ratio = Total\ Liabilities / Total\ Assets \cdots equation\ 2.4.4\]

A figure of 0.5 or less is ideal. In other words, no more than half of the company’s assets should be financed by debt. In reality, many investors tolerate significantly higher ratios. Capital-intensive industries like heavy manufacturing depend more on debt than service-based firms, for example, and debt ratios in excess of 0.7 are common.

As its name implies, the debt-to-equity ratio instead compares the company’s debt to its stockholder equity. It’s calculated as follows:

\[Debt-to-equity\ Ratio = Total\ Liabilities / Stockholders'\ Equity \cdots equation\ 2.4.5\]

If you consider the basic accounting equation (Assets – Liabilities = Equity), you may realize that these two equations are really looking at the same thing. In other words, a debt ratio of 0.5 will necessarily mean a debt-to-equity ratio of 1. In both cases, a lower number indicates a company less dependent on borrowing for its operations.

While both these ratios can be useful tools, they’re not without shortcomings. For example, both calculations include short-term liabilities in the numerator. Most investors, however, are more interested in long-term debt. For this reason, some traders will substitute “total liabilities” with “long-term liabilities” when crunching the numbers.

In addition, some liabilities may not even appear on the balance sheet, and thus don’t enter into the ratio. Operating leases, commonly used by retailers, are one example. Generally Accepted Accounting Principles, or GAAP, doesn’t require companies to report these on the balance sheet, but they do show up in the footnotes. Investors who want a more accurate look at debt will want to comb through financial statements for this valuable information.

Interest Coverage Ratio

Perhaps the biggest limitation of the debt and debt-to-equity ratios is that they look at the total amount of borrowing, not the company’s ability to actually service its debt. Some organizations may carry what looks like a significant amount of debt, but they generate enough cash to easily handle interest payments.

Furthermore, not all corporations borrow at the same rate. A company that has never defaulted on its obligations may be able to borrow at a 3 percent interest rate, while its competitor pays a 6 percent rate.

To account for these factors, investors often use the interest coverage ratio. Rather than looking at the sum total of debt, the calculation factors in the actual cost of interest payments in relation to operating income (considered one of the best indicators of long-term profit potential). It’s determined with this straightforward formula:

\[Interest\ Coverage\ Ratio = Operating\ Income / Interest\ Expense \cdots equation\ 2.4.6\]

In this case, higher numbers are seen as favorable. In general, a ratio of 3 and above represents a strong ability to pay off debt, although here, too, the threshold varies from one industry to another.

Read more: Understanding Leverage Ratios | Investopedia

Comparison

When we observe from the table 2.4.1B and table 2.4.2B, we can know the company NKE is growing since assets, liabilities, equity all increase beyond the years but VFC almost fluctuate within a range.

figure 2.4.1: Solvency (leverage) ratio.

figure 2.4.1: Solvency (leverage) ratio.

table 2.4.3: Leverage ratios of stock counter NKE and VFC.

We can know from above table where both companies have low leverage ratio.

2.5 Question 5

  Compute the main profitability ratios for both Nike and V.F.Corporation (Asset turnover, profit margin, and ROA). Do this for the last 3 years available.
figure 2.5.1: Profitability ratio.

figure 2.5.1: Profitability ratio.

Kindly refer to Operations Management: Module 1: Operations Strategy Assignment 2 by ®γσ, Eng Lian Hu 20161 refer to reference paper 02 in 4.4 References to know about: - Asset Turnover - Operating Margin - Return of Equity

table 2.5.1A: Key financial statement of NKE.

table 2.5.1B: Key financial statement of VFC.

table 2.5.2A: Profitability ratio of NKE.

table 2.5.2B: Profitability ratio of VFC.

Comparison

By refer to table 2.5.2A and table 2.5.2B:

  • Asset turnover: NKE generates more revenue from the its company asset compare to VFC.
  • Net Profit Margin: The profit margin of VFC slightly higher than NKE.
  • ROA: The return of assets of both companies almost same.
  • ROE: The return on equity of both companies almost same.

2.6 Question 6

  Compute the cash profitability ratio for both Nike and V.F.Corporation. Do this for the last 3 years available.
figure 2.6.1: Cash profitability ratio.

figure 2.6.1: Cash profitability ratio.

table 2.6.1A: Cash profitability ratio of NKE.

table 2.6.1B: Cash profitability ratio of VFC.

Comparison

From above tables, CFOA of both companies have no big range difference on making profit but latest year 2015 NKE has greater cash profitability ratio.

2.7 Question 7

  Analyze the cash flow statement of both Nike and V.F.Corporation in the last 3 years. Are the companies investing to grow the business? Are they raising cash from investors or are they returning cash to investors?

table 2.7.1A: cash flow statement of NKE.

table 2.7.1B: cash flow statement of VFC.

What is ‘Cash Flow From Operating Activities (CFO)’?

Cash flow from operating activities (CFO) is an accounting item indicating the money a company brings in from ongoing, regular business activities, such as manufacturing and selling goods or providing a service. Cash flow from operating activities does not include long-term capital or investment costs. It does include earnings before interest and taxes plus depreciation minus taxes.

Also called operating cash flow or net cash from operating activities, it can be calculated as follows:

\[Cash\ Flow\ From\ Operating\ Activities = EBIT + Depreciation - Taxes \cdots equation\ 2.7.1\]

Read more: Cash Flow From Operating Activities Definition | Investopedia

What is ‘Cash Flow From Investing Activities’?

Cash flow from investing activities is an item on the cash flow statement that reports the aggregate change in a company’s cash position resulting from any gains (or losses) from investments in the financial markets and operating subsidiaries and changes resulting from amounts spent on investments in capital assets such as plant and equipment.

When analyzing a company’s cash flow statement, it is important to consider each of the various sections which contribute to the overall change in cash position. In many cases, a firm may have negative overall cash flow for a given quarter, but if the company can generate positive cash flow from business operations, the negative overall cash.

Read more: Cash Flow From Investing Activities Definition | Investopedia

What is ‘Cash Flow From Financing Activities’?

A category in a company’s cash flow statement that accounts for external activities that allow a firm to raise capital and repay investors, such as issuing cash dividends, adding or changing loans or issuing more stock. Cash flow from financing activities shows investors the company’s financial strength. A company that frequently turns to new debt or equity for cash, for example, could have problems if the capital markets become less liquid.

The formula for cash flow from financing activities is as follows:

\[Cash\ Received\ from\ Issuing\ Stock\ or\ Debt - Cash\ Paid\ as\ Dividends\ and Re-Acquisition\ of\ Debt/Stock \cdots equation\ 2.7.2\]

Read more: Cash Flow from Financing Activities Definition | Investopedia

Comparison

From above tables, we observed that both companies make profit from the cash flow, while NKE had refinanced and repurchased the stock in year 2014.

  • Cash from operating activities: positive figure means both companies making money from the business.
  • Cash from investing activities: The negative figure might indicate the company buying assets or repurchased the stock. You can refer to table 2.5.1A and table 2.5.1B to know the assets and equity as well. Examples of negative cash flow from investing activities includes the purchase of fixed assets, the purchase of investment instruments such as stocks, and lending money. Examples of positive cash flow from investing includes the sale of fixed assets, the sale of investment instruments, and the collection of loans and insurance proceeds.
  • Cash from financing activities: Financing activities that generate negative cash flow include spending cash to repurchase previously issued stock, to pay down debt, to pay interest on debt and to pay dividends to shareholders.

2.8 Question 8

  Compute the main valuation ratios for Nike and V.F.Corporation (Value/OPAT and Market/Book). You only need to do this using the most recently available data so as to reflect the current valuation of the companies.
figure 2.8.1: Valuation ratio.

figure 2.8.1: Valuation ratio.

Market Value Versus Book Value

Understanding the difference between book value and market value is a simple yet fundamentally critical component of any attempt to analyze a company for investment. After all, when you invest in a share of stock or an entire business, you want to know you are paying a sensible price.

Book value literally means the value of the business according to its “books” or financial statements. In this case, book value is calculated from the balance sheet, and it is the difference between a company’s total assets and total liabilities. Note that this is also the term for shareholders’ equity. For example, if Company XYZ has total assets of $100 million and total liabilities of $80 million, the book value of the company is $20 million. In a very broad sense, this means that if the company sold off its assets and paid down its liabilities, the equity value or net worth of the business, would be $20 million.

Market value is the value of a company according to the stock market. Market value is calculated by multiplying a company’s shares outstanding by its current market price. If Company XYZ has 1 million shares outstanding and each share trades for $50, then the company’s market value is $50 million. Market value is most often the number analysts, newspapers and investors refer to when they mention the value of the business.

Implications of Each

Book value simply implies the value of the company on its books, often referred to as accounting value. It’s the accounting value once assets and liabilities have been accounted for by a company’s auditors. Whether book value is an accurate assessment of a company’s value is determined by stock market investors who buy and sell the stock. Market value has a more meaningful implication in the sense that it is the price you have to pay to own a part of the business regardless of what book value is stated.

As you can see from our fictitious example from Company XYZ above, market value and book value differ substantially. In the actual financial markets, you will find that book value and market value differ the vast majority of the time. The difference between market value and book value can depend on various factors such as the company’s industry, the nature of a company’s assets and liabilities, and the company’s specific attributes. There are three basic generalizations about the relationships between book value and market value:

  • Book Value Greater Than Market Value: The financial market values the company for less than its stated value or net worth. When this is the case, it’s usually because the market has lost confidence in the ability of the company’s assets to generate future profits and cash flows. In other words, the market doesn’t believe that the company is worth the value on its books. Value investors often like to seek out companies in this category in hopes that the market perception turns out to be incorrect. After all, the market is giving you the opportunity to buy a business for less than its stated net worth.
  • Market Value Greater Than Book Value: The market assigns a higher value to the company due to the earnings power of the company’s assets. Nearly all consistently profitable companies will have market values greater than book values.
  • Book Value Equals Market Value: The market sees no compelling reason to believe the company’s assets are better or worse than what is stated on the balance sheet.

It’s important to note that on any given day, a company’s market value will fluctuate in relation to book value. The metric that tells this is known as the price-to-book ratio, or the P/B ratio:

\[P/B\ Ratio = Share\ Price/Book\ Value\ Per\ Share \cdots equation\ 2.8.1\]

(where Book Value Per Share equals shareholders’ equity divided by number of shares outstanding)

So one day, a company can have a P/B of 1, meaning that BV and MV are equal. The next day, the market price drops and the P/B ratio is less than 1, meaning market value is less than book value. The following day the market price zooms higher and creates a P/B ratio of greater than 1, meaning market value now exceeds book value. To an investor, whether the P/B ratio is 0.95, 1 or 1.1, the underlying stock trades at book value. In other words, P/B becomes more meaningful the greater the number differs from 1. To a value-seeking investor, a company that trades for a P/B ratio of 0.5 implies that the market value is one-half of the company’s stated book value. In other words, the market is selling you each $1 of net assets (net assets = assets - liabilities) for 50 cents. Everyone likes to buy things on sale, right?

Read more: Market Value Versus Book Value | Investopedia

table 2.8.1: Valuation ratio of company NKE and VFC.

  • Market Value ÷ Operating Profits After Taxes: these ratio consider as the investors’ prospective ratio in financial market based on every single dollar net profit. Normally a company make profit consistantly will has a ratio which more than 1. NKE has greater ratio than VFC since we can know NKE is healthier than VFC from the cash flow and other key ratios from income and balance statements.
  • Market Value ÷ Book Value: Both companies have a ratio which greater than 1, it means investors in financial market forecast these two companies will keeping make profit. Normally a company make profit consistantly will has a ratio which more than 1. NKE has greater ratio than VFC since we can know NKE is healthier than VFC from the cash flow and other key ratios from income and balance statements.

2.9 Question 9

  Discuss the implications of your results. How do the two companies compare to each other? What have you learned from the comparison of financial ratios for these two companies? (2 paragraphs maximum)

As conclusion to compare with these two companies:

  • From table 2.3.1 and table 2.3.2, we can know the current ratio, quick ratio and also cash ratio of NKE are greater than VFC’s. The ratio greater than 1 means that the company can reaction quicky on any unforeseen financial turnover issue and indicate that the company is a healthy company with sufficient cash.
  • From table 2.4.1B and table 2.4.2B, we know the company size of NKE is larger than VFC. table 2.4.3 shows both companies have low levarage ratio on debt.
  • table 2.5.1A and table 2.5.1B are the income statement of both comapny which showing the business revenue of NKE is greater than VFC. table 2.5.2A and table 2.5.2B are the tables differentiate the profitability ratio of both companies whic are alsmost similar but the Asset-turnover ratio of VFC slighly increase as year goes by.
  • Cash profitanility ratios from table 2.6.1A and table 2.6.1B are the cash flow rate from assets. NKE has greater ratio than VFC. Meanwhile, the CFOA of NKE in year 2015 increase from 2014 but oppsite with VFC.
  • The cash flow statement in table 2.7.1A and table 2.7.1B show both companies repurchase the stock of own company. Normally when a company think thier business growth is undervalued by the market value will buyback the stock. Sometimes that is due to the company protest from the speculations by hedge fund or hostile takeover by other business group.
  • table 2.8.1 shows the market valuation ratio of both companies. The ratio indicates the investors prospective to the company. Investors from financial market evaluated NKE’s from its past and current value and optimistic to its future prospect and growing rate will be better than future value of VFC.

3. Conclusion

Here is the video, you can refer to the answer from the lecturer after finished the assignment. Below are some questions and understanding to the assignment.

  • The Total Liabilities / Total Assets ratio inside table 2.4.3 different with above answer.

    …The tools you need to understand Buffett's definition of intrinsic value go by the soporific moniker of discounted cash flow analysis. But when the richest guy in the world says it's the most important thing you can know if you want to get rich, I'll bet it's worth staying awake for…

    quote 3.1: source taken from Cash Flow Analysis

  • The cash flow statement is the crucial evaluation of intrinsic value prior to make investment which was quoted by Warren Buffet2 Kindly refer to Cash Flow Analysis for further details., I am not understand completely in table 2.7.1A, I need to keep up learning on interpretation of cashflow statement which applicable in real life.
  • The measured ratio in table 2.8.1 different with the answer from the video. I tried to looking for some reference.

Further learning required in order to understand an applicable and realizable evaluation skills for investment in our real life in evaluation of corporates and the interpretation of intrinsic value from Warren Buffet.

4. Appendices

4.1 Documenting File Creation

It’s useful to record some information about how your file was created.

[1] “2016-07-16 20:38:18 JST” setting value
version R version 3.3.1 (2016-06-21) system x86_64, mingw32
ui RTerm
language (EN)
collate English_United States.1252
tz Asia/Tokyo
date 2016-07-16
sysname release version nodename “Windows” “10 x64” “build 10586” “RSTUDIO-SCIBROK” machine login user effective_user “x86-64” “scibr” “scibr” “scibr”

4.2 Versions’ Log

4.3 Speech and Blooper

I do appreciate that University of Illinois at Urbana–Champaign provides the Improving Business Finances and Operations specialization via Coursera. I used to study Certified Accounting Technician (CAT) course at PAAC more more decade. Now I need to review the finance and accounting course prior to conduct my research Analyse the Finance and Stocks Price of Bookmakers.

There are few books stated in 3. Conclusion and below references that I need to read for further understanding.

Financial Evaluation and Strategy: Corporate Finance : Module 2

Financial Evaluation and Strategy: Corporate Finance : Module 2

Improving Business Finances and Operations Specialization by University of Illinois at Urbana-Champaign

®γσ, Eng Lian Hu 白戸則道®

2016-07-24

1. Introduction

1.1 Overview

The purpose of this assignment is to give you the opportunity to apply the concepts you have learned in this module and to discuss some of the key ideas of the module in your own words. Follow the instructions provided and respond to each question. This is a required activity for this module. The activity is peer reviewed, so after you submit your responses, you will review submissions by fellow learners in the course.

1.2 Review criteria

For Assignment #2, you will be responsible for evaluating the submissions of THREE of your peers. Before evaluating, please see the video I prepared with my discussion of the answers to Assignment #2.

Assignment #2 is worth 100 points total. Points are only given for correct/reasonable answers in the manner specified below, incorrect/unreasonable answers get zero points. Points should be allocated as follows:

1.2.1 Question 1

  • 10 points for a reasonable answer that is based on the arguments that we discussed in the lectures
  • 5 points for an incomplete answer or a correct answer that is too long (longer than 1 paragraph)

1.2.2 Question 2

  • 10 points for a reasonable answer that is based on the arguments that we discussed in the lectures
  • 5 points for an incomplete answer or a correct answer that is too long (longer than 1 paragraph)

1.2.3 Question 3

  • 10 points for a reasonable answer that is based on the arguments that we discussed in the lectures
  • 5 points for an incomplete answer or a correct answer that is too long (longer than 2 paragraph)

1.2.4 Question 4-a

  • 10 points for a reasonable answer that is based on the arguments that we discussed in the lectures
  • 5 points for an incomplete answer or a correct answer that is too long (longer than 2 paragraph)

1.2.5 Question 4-b

  • 10 points for a reasonable answer that is based on the arguments that we discussed in the lectures
  • 5 points for an incomplete answer or a correct answer that is too long (longer than 2 paragraph)

1.2.6 Question 5-a

  • 10 points for the correct cash flows
  • 5 points for an answer that is partially correct

1.2.7 Question 5-b

  • 10 points for the correct cash flows
  • 5 points for an answer that is partially correct

1.2.8 Question 5-c

  • 10 points for the correct cash flows
  • 5 points for an answer that is partially correct

1.2.9 Question 5-d

  • 10 points for correctly explaining what happens at the end of the second year
  • 5 points for an answer that is partially correct

1.2.10 Question 5-e

  • 10 points for a reasonable answer that correctly discusses the trade-off in light of the answers from a) to d)
  • 5 points for an incomplete answer, for example if either the benefit or the cost of changing the system is not well explained

1.2.11 Recommendations for Fair Peer Review:

  • For questions that require calculations only, the score should be based on whether or not the answer provided is correct.
  • For subjective questions, the score should not be based on whether or not you agree with the answer, rather on whether the answer is complete and well-supported.
  • Both content and organization are important components of a response. Good writing is confident and clearly focused with relevant details to enrich the content. Good writing also follows instructions, such as word limits, and offers requested information.
  • A clear and concise answer is preferable to a long response that lacks coherence.
  • Focus should be on content; try not to unduly penalize responses for spelling or grammar.

1.3 Reminders

1.3.1 Using the Forums

Your fellow students are a great resource, and we encourage you to sharpen your ideas against them in the forums. You can post your arguments in the forums and receive feedback before submitting your assignment.

1.3.2 Honor Code

Please remember that you have agreed to the Honor Code, and your submission should be entirely yours. Our definition of plagiarism follows from standard literature: passing off someone else’s work as your own, whether from your peers or Wikipedia. If you need to quote material, remember to cite your source, for example: “But, as expressed by Spinoza, all things excellent are as difficult as they are rare (Baruch Spinoza,”Ethica" source: thinkexist.com)."

2. Case Study

2.1 Question 1

Question:

You are the CFO of a small manufacturing company, and you just figured out that your company will need to raise 30 million dollars to finance an expansion plan. The company will likely not need the 30 million now, but only in a few years as capital expenditure needs grow. You are considering two options. Option 1 is to wait until the future capital expenditure needs arise to borrow money. The second option is to borrow now, and retain the funds in the balance sheet. Discuss the trade-off that you would need to consider before making this decision (1 paragraph maximum).

Answer:

Option 1

borrow money when needed:

  • Advantage:
    • Company can save the interest paid for the loan.
  • Disadvantage:
    • Need to think of financing problem when needed.

Option 2

borrow money now for future use:

  • Advantage:
    • Company can budget a portion for other short term investment provided receivable/payback prior to start the 30 million dollars project.
    • Ease on the cash flow of company due to sufficient cash.
    • The fund might be spared for emergency use when needed. Provided it may not affect the launching of planed project.
  • Disadvantage:
    • Need to bear the interest paid to bank(s) / bonds.
    • Need to bear the depreciation of time value of money (NPV) if the mentioned fund just put idle.

2.2 Question 2

Question:

Explain why an increase in accounts receivable is a short-term investment in the business. (1 paragraph maximum)

Answer:

  • Receivable debt increase the sales for company.
  • For example, a sportsbook hedge fund invest (place bets) on a credit market company,(let say Maxbet or Crown etc.) the return from the staking on the credit market can increase the profit. (Normally cash market company set a low staking limit for customers compare to credit market)
  • It consider as short-term investment, let say placed GBP100,000 on multiple soccer matches with average odds price 1.25, the return of GBP120,000 is a profitable investment.
  • It might consider as an investment for trust, because the credit line might expend the future sales based on the credence.

2.3 Question 3

Question:

You are the CFO of a small retailing business that has strong seasonality in sales. Your business consistently generates negative cash flow in the first two quarters, though cash flow is positive if you consider the year as a whole (sales are strong in the third and fourth quarters). Which options does the CFO have to manage this company’s short term finances ? (2 paragraphs maximum)

Answer:

  • Bank loan for 3 quaters (if avaiable, since interest rate paid for annual bank loan will be higher) since the cash flow is positive from 3rd quater.
  • Sufficient cash might make the operation running smoothly in first two quarters. (to offset the financial problems like overhead cost and fixed cost etc for first two quarters)

2.4 Question 4-a

Question:

You are the CFO of a medium-sized Agribusiness, and you have negotiated favorable terms to pay for supplies of seeds and equipment. Your suppliers allow you to pay for most these necessary inputs at the end of harvest, after you have sold your main crops. After harvest, your business needs to restock on seeds and equipment for next year’s harvest. As as a result of this business model, your Agribusiness carries a significant amount of accounts payable throughout the year.

Explain why this business model creates liquidity risk for the company. (1 paragraph maximum)

Answer:

  • Liquidity risk might be facing since some suppliers might ask for payment before harvested.
  • CFO needed to ask for the delay of payment after harvested since the company faced shortage of cash.
  • The credit line business might create a win-win situation for suppliers and also the company. Suppliers can get profit the business even though it is not receive immediate but reacivable annually. Meanwhile, the company can operate the business smoothly with sufficient fund to harvest and generates profit upon sales.

2.5 Question 4-b

Question:

You are the CFO of a medium-sized Agribusiness, and you have negotiated favorable terms to pay for supplies of seeds and equipment. Your suppliers allow you to pay for most these necessary inputs at the end of harvest, after you have sold your main crops. After harvest, your business needs to restock on seeds and equipment for next year’s harvest. As a result of this business model, your Agribusiness carries a significant amount of accounts payable throughout the year.

Explain how you can use a bank credit line to help manage the liquidity risk that you identified in part a. (1 paragraph maximum)

Answer:

  • As mentioned in 2.4 Question 4-a, since the company faced financial liquidity problem before harvest. Therefore a credit line business/agreement required to offset the liquidity problem since the company harvest once a year and there is a portion of cash might reserved for 12 months expenditure. Insuffient fund to pay for the renwal of equiments and also seeds.
  • Credit line not only overcome the short term financial problem but also a long term business co-operation for both parties.

2.6 Question 5-a

Question:

You are the CFO of a company that is considering whether it is worthwhile to speed up the collection of accounts receivable to reduce the cash conversion cycle. This is the current situation in your company

  • Expected annual sales = 1 billion
  • 80% of these sales are received immediately, 20% after one year

You are considering whether it is worth to demand quicker payment from your costumers. You estimate that you can collect 90% of annual sales immediately if you lower prices by a certain amount. As a result of these discounts, your expected annual sales will decrease by 2%, to 980 million a year.

To solve this question, assume that there are no costs and no taxes. Thus, sales are equal to profits. In addition, there are no existing receivables to collect at the beginning of the first year.

In the current situation (80% collected immediately), what are the cash flows at the beginning and at the end of the first year?

Answer:

table 2.6.1: cash flow stament of company.

From above table, 80% of sales receive the payment immediately after sales but the rest of 20% need to wait until year end but receivables.

2.7 Question 5-b

Question:

You are the CFO of a company that is considering whether it is worthwhile to speed up the collection of accounts receivable to reduce the cash conversion cycle. This is the current situation in your company

  • Expected annual sales = 1 billion
  • 80% of these sales are received immediately, 20% after one year

You are considering whether it is worth to demand quicker payment from your costumers. You estimate that you can collect 90% of annual sales immediately if you lower prices by a certain amount. As a result of these discounts, your expected annual sales will decrease by 2%, to 980 million a year.

To solve this question, assume that there are no costs and no taxes. Thus, sales are equal to profits. In addition, there are no existing receivables to collect at the beginning of the first year.

If you decide to implement the change (90% collected immediately), what are the cash flows at the beginning and at the end of the first year?

Answer:

table 2.7.1: cash flow stament of company.

From the table, we know the sales is decreased from $1 bil to $980 mil, therefore 90% of sales is $882 mil and the rest of receivables are $98 mil after launching the quiker demand for payment. There might due to some distributors/customers might not be able to pay the money immediately.

  • The immediate cash from sales is more than previous $800 mil. The company can use the fund for further investment.
  • Although the total sales in annual report will be $980 mil which is less than previous 1 bil, the NPV and the inflation rates might need to take consideration.
  • Some companies might prefer higher direct cash from sales since there might use the cash for other investment provided the return of investment (ROI) is greater than ROI of $20 mil.

2.8 Question 5-c

Question:

Now consider what happens in the folllowing year. To do so, assume that sales are expected to remain stable irrespective of which collection system you use. That is, sales are 1,000 a year in the current system and 980 a year in the new system.

At the end of the first year, you will collect receivables that were generated in the beginning of the first year, and make new sales for the second year. Notice that the beginning of the second year coincides with the end of the first year (think December 31 – January 1.)

Compute the cash flows for the second year in the two cases (80% and 90% collection systems).

Answer:

table 2.8.1: cash flow stament of company on 80%-20%.

From the table showing above, we can know the immediate cash from sales is $800 mil, and the breakdown for the Year End will be $200 mil. Therefore the $200 mil will be only showing at the end of year since it is not immediate cash from sales.

table 2.8.2: cash flow stament of company on 90%-10%.

Similar theory applied to table 2.8.1.

2.9 Question 5-d

Question:

What will happen at the end of the second year?

Answer:

table 2.9.1: cash flow stament of company on 80%-20%.

From the table showing above, we can know the immediate cash from sales is $800 mil, and the breakdown for the Year End will be $200 mil. Therefore the $200 mil will be only showing at the end of year since it is not immediate cash from sales. Similar with second year, the immediate cash from sales on second year, the receivables will only showing in year end but not immediate cash from sales.

table 2.9.2: cash flow stament of company on 90%-10%.

Similar theory applied to table 2.9.1.

2.10 Question 5-e

Question:

Now you should be ready to discuss the trade-off that the CFO will face when making the decision to speed up collection or not. What do you gain if you make this decision? What do you lose?

Important note: To make a decision about the collection system we need the concept of Net Present Value (NPV). We will develop this concept in Module 3 and finish this problem after we have learned how to calculate and use NPV.

Answer:

table 2.10.1: cash flow stament of company on 80%-20%.

table 2.10.2: cash flow stament of company on 90%-10%.

Lets compare the table 2.10.1 and table 2.10.2, the cash flow from the ealier table shows low immediate cash flow. Normally a receivables might effect the cash flow statement especially long term receivables. Receivables showing on statement is not immediate cash but succession of getting money back from sales.

3. Conclusion

Below is the video and explanation by lecturer where you can refer to.

Immediate cash from sales will only records in daily cashbook but the year end annual report will summarize the total but no breakdown of the timing of both sales and also receivables.

Here I also attach with the review on module 2.

4. Appendices

4.1 Documenting File Creation

It’s useful to record some information about how your file was created.

[1] “2016-07-24 00:31:17 JST” setting value
version R version 3.3.1 (2016-06-21) system x86_64, mingw32
ui RTerm
language (EN)
collate English_United States.1252
tz Asia/Tokyo
date 2016-07-24
sysname release version nodename “Windows” “10 x64” “build 10586” “RSTUDIO-SCIBROK” machine login user effective_user “x86-64” “scibr” “scibr” “scibr”

4.2 Versions’ Log

4.3 Speech and Blooper

I do appreciate that University of Illinois at Urbana–Champaign provides the Improving Business Finances and Operations specialization via Coursera. I used to study Certified Accounting Technician (CAT) course at PAAC more more decade. Now I need to review the finance and accounting course prior to conduct my research Analyse the Finance and Stocks Price of Bookmakers.

There are few books below that I need to read for further understanding.

Financial Evaluation and Strategy: Corporate Finance : Module 3

Financial Evaluation and Strategy: Corporate Finance : Module 3

Improving Business Finances and Operations Specialization by University of Illinois at Urbana-Champaign

®γσ, Eng Lian Hu 白戸則道®

2016-07-31

1. Introduction

1.1 Overview

Instructions

The purpose of this assignment is to give you the opportunity to apply the concepts you have learned in this module and to discuss some of the key ideas of the module in your own words. Follow the instructions provided and respond to each question. This a required activity for this module. The activity is peer reviewed, so after you submit your responses, you will review submissions by fellow learners in the course.

1.2 Review criteria

For Assignment #3, you will be responsible for evaluating the submissions of THREE of your peers. Before evaluating, please see the video I prepared with my discussion of the answers to Assignment #3.

Assignment #3 is worth 100 points total. Points are only given for correct/reasonable answers in the manner specified below, incorrect/unreasonable answers get zero points. Points should be allocated as follows:

Question 1

  • 10 points for a reasonable answer that is based on the arguments that we discussed in the lectures
  • 5 points for an incomplete answer or a correct answer that is too long (longer than 1 paragraph)

Question 2

  • 10 points for a reasonable answer that is based on the arguments that we discussed in the lectures.
  • 5 points for an incomplete answer or a correct answer that is too long (longer than 1 paragraph).

Question 3

  • 10 points for figuring out what is the NPV.
  • 5 points for an incomplete answer.

Question 4

  • 10 points a reasonable answer that is based on the arguments that we discussed in the lectures.
  • 5 points for an incomplete answer or a correct answer that is too long (longer than 1 paragraph).

Question 5

  • 10 points for the correct cash flows.
  • 5 points for an answer that is partially correct.

Question 6

  • 10 points for a reasonable answer that is based on the arguments that we discussed in the lectures.
  • 5 points for an incomplete answer.

Question 7

  • 20 points for a complete answer that is correct. To get 20 points the student should set up the decision tree correctly, and calculate the correct NPV.
  • 15 points for a good answer that has calculation mistakes. For example if the student sets up the right decision tree but makes a calculation mistake to get the NPV.
  • 10 points for an incomplete answer.

Question 8

  • 10 points for a reasonable answer that is based on the arguments that we discussed in the lectures.
  • 5 points for an incomplete answer.

Question 9

  • 10 points for a reasonable answer that is based on the arguments that we discussed in the lectures.
  • 5 points for an incomplete answer or a correct answer that is too long (longer than 1 paragraph).

Recommendations for Fair Peer Review:

For questions that require calculations only, the score should be based on whether or not the answer provided is correct.

For subjective questions, the score should not be based on whether or not you agree with the answer, rather on whether the answer is complete and well-supported.

Both content and organization are important components of a response. Good writing is confident and clearly focused with relevant details to enrich the content. Good writing also follows instructions, such as word limits, and offers requested information.

A clear and concise answer is preferable to a long response that lacks coherence. Focus should be on content; try not to unduly penalize responses for spelling or grammar.

1.3 Instructions

There are multiple steps to this assignment.

First, you will submit your answers to each of the questions based on the information in the Assignment Details section. Enter your answers directly in the spaces provided in the My submission tab. You may save a draft of your work as you go, and you can come back later to continue working on your draft. When you are finished working, click the Preview button, verify your identity, and then Submit the assignment. Please answer each question fully and concisely.

Then, you will evaluate the submissions of at least THREE of your peers based on the instructions provided. You may begin giving feedback to other students as soon as you submit your assignment, click the Review peers tab to begin. Feel free to provide additional reviews beyond the three required!

Assignment 3 is described in Video Lesson 3-13, you should watch this video before doing the assignment.

The discussion of the assignment solution is provided in Video Lesson 3-14. Do the assignment on your own first, before viewing the assignment discussion video! Please view the assignment discussion video before completing the review of your peers.

1.4 Reminders

Using the Forums

Your fellow students are a great resource, and we encourage you to sharpen your ideas against them in the forums. You can post your arguments in the Module 1 Forum and receive feedback before submitting this assignment. Additionally, make sure to pay attention to posts from the instructors, which are intended to spur conversation on topics related to the week’s theme.

Honor Code

Please remember that you have agreed to the Honor Code, and your submission should be entirely yours. Our definition of plagiarism follows from standard literature: passing off someone else’s work as your own, whether from your peers or Wikipedia. If you need to quote material, remember to cite your source, for example: “But, as expressed by Spinoza, all things excellent are as difficult as they are rare (Baruch Spinoza,”Ethica" source: thinkexist.com)."

2. Case Study

2.1 Question 1

Question:

Explain why is it that a company that takes all projects that have positive NPV will end up maximizing shareholder value. Why is market efficiency an important condition behind the equivalence of NPV and shareholder value maximization ? (1 paragraph)

Answer:

  - NPV is a measurement on the return of the investment on a project.
  - Normally, the stocks price of the business group will increse once a company announced acquisation of a profitable (positive NPV) project.
  - Basically it is consider as efficient market since the postive valued project will cause increasing of stocks price.

table 2.1.1: Example of NPV of project A and project B of a company.

Kindly refer to 2.1.3 Net present value inside Managerial Accounting: Tools for Facilitating and Guiding Business Decisions : Module 2 Mini-Project1 Please refer to Alternative link if primary link is corrupted for a case study on return of investment on two options.

What is ‘Net Present Value - NPV’?

Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of a projected investment or project.

The following is the formula for calculating NPV:

\(NPV = \sum_{t=1}^{T}\frac{C_{t}}{(1+r)^t}-C_{o}\)

Net Present Value (NPV)

where

\(C_{t} = net\ cash\ inflow\ during\ the\ period\ t\)

\(C_{o} = total\ initial\ investment\ costs\)

\(r = discount\ rate,\ and\)

\(t = number\ of\ time\ periods\)

A positive net present value indicates that the projected earnings generated by a project or investment (in present dollars) exceeds the anticipated costs (also in present dollars). Generally, an investment with a positive NPV will be a profitable one and one with a negative NPV will result in a net loss. This concept is the basis for the Net Present Value Rule, which dictates that the only investments that should be made are those with positive NPV values.

When the investment in question is an acquisition or a merger, one might also use the Discounted Cash Flow (DCF) metric.

Apart from the formula itself, net present value can often be calculated using tables, spreadsheets such as Microsoft Excel or Investopedia’s own NPV calculator.

Read more: Net Present Value (NPV) Definition | Investopedia

2.2 Question 2

Question:

Does the NPV rule (take all positive NPV projects) guarantees that a company will make socially responsible investments ? You may need to recap lecture 1 to answer this question. (1 paragraph)

Answer:

  - For some business, NPV assures shareholder value maximization but will generate conflicts between stakeholders and social resposibility.
  - For example: gambling, tobacco, heroin, opium, wine and brothel business will generate social issues but it will generate profit to company.

2.3 Question 3

Question:

What is the present value of a growing perpetuity that generates a cash flow of 35 next year and grows at a rate of 7% a year forever, if the discount rate is 5% a year? (Hint : it is not a negative number !)

Answer:

  - 35 ÷ (5% - 7%) = -1,750
  - In theory, if the growth rate is higher than the discount rate, the growing perpetuity would have an infinite value.
Equation 2.3.1: Present Value of Growing Perpetuity

Equation 2.3.1: Present Value of Growing Perpetuity

The present value of a growing perpetuity formula is the cash flow after the first period divided by the difference between the discount rate and the growth rate.

A growing perpetuity is a series of periodic payments that grow at a proportionate rate and are received for an infinite amount of time. An example of when the present value of a growing perpetuity formula may be used is commercial real estate. The rental cash flows could be considered indefinite and will grow over time.

It is important to note that the discount rate must be higher than the growth rate when using the present value of a growing perpetuity formula. This is due to the present value of a growing perpetuity formula being an infinite geometric series as explained in one of the following sections. In theory, if the growth rate is higher than the discount rate, the growing perpetuity would have an infinite value.

Kindly refer to Present Value of Growing Perpetuity for more information.

2.4 Question 4

Question:

Explain why the IRR rule (take projects with IRR greater than the discount rate) is equivalent to the NPV rule (take projects with positive NPV). What are the conditions that you need to check to make sure that you can compute IRR ? (1 paragraph)

Answer:

We can know from table 2.1.1 where :

  • IRR of Option.A = 27.81%
  • IRR of Option.B = 9.09%

A positive in row Difference: A positive net present value indicates that the projected earnings generated by a project or investment (in present dollars) exceeds the anticipated costs (also in present dollars). Generally, an investment with a positive NPV will be a profitable one and one with a negative NPV will result in a net loss. This concept is the basis for the Net Present Value Rule, which dictates that the only investments that should be made are those with positive NPV values.

Read more: Net Present Value (NPV) Definition | Investopedia

Kindly refer to 2.1.3 Net present value inside Managerial Accounting: Tools for Facilitating and Guiding Business Decisions : Module 2 Mini-Project2 Please refer to Alternative link if primary link is corrupted for a case study on return of investment on two options.

2.5 Question 5

Question:

Leather Goods Inc. wants to expand its product line into wallets. The required initial outlay is $700,000. They expect to sell 150,000 units per year, and their planning horizon is 5 years. The price of wallets is estimated to be equal to $12 for the entire period, and the costs of production are $9 per unit for the entire period. However, the company expects the wallet project to erode $200,000 of the yearly sales of the existing products of the company. In addition, they estimate that competitors, who produce similar wallets, will erode $100,000 of the firm’s current sales if the wallet project does not go through. If the wallet project does go through, erosion from competitors is going to be equal to 50,000. Assume no salvage value (the project is worth zero after the end of 5 years), no taxes, no working capital and straight line depreciation. Draw a time line with the relevant cash flows for the wallet project. There is no need to compute IRR or NPV.

Answer:

table 2.5.1: NPV of Leather Goods Inc.

  • 150,000 units x ($12 - $9) = $450,000 per year

table 2.5.2: Summary of Leather Goods Inc.’s projects

  • Wallet project reduces erosion from competitors.
  • Old - New has incremental cash flow $300,000.

table 2.5.3: Summary of Leather Goods Inc.’s new cash flow statement.

2.6 Question 6

Question:

You are considering whether to enroll in a full time MBA at an annual after-tax cost of 200,000 including tuition and all living expenses. The program lasts two years. You estimated that after the program ends, you will be able to increase your lifetime, after-tax earnings by 700,000. Is the MBA a positive NPV investment for you?

Answer:

  - Total Cost : $200,000 x 2 years = $400,000
  - Life-time Earnings = $700,000
  - NPV : $700,000 - $400,000 = $300,000 (since the student might pursuite for MBA degree after Bachelor degree)
  - Due to question doesn't mention the person is an employee or student. Might be there is a student or an employee? Here I rejected the answer from Lecturer Heitor Almeida.

2.7 Question 7

Question:

You work for a pharmaceutical company that is developing a new drug to reduce cholesterol. Based on current information, the drug’s NPV is estimated to be 200 million dollars. You are trying to decide whether it is worth undertaking additional research before launching the drug. Specifically, you want to find out whether the drug can also be sold to pregnant women. Right now the drug is not approved to be used for that group. This R&D will cost 10 million dollars, and will last for one year. If the research turns out to be positive, you can increase the drug’s NPV to 250 million (in one year). But if the research turns out negative results you have to go back to the original plan. In that case the NPV of the drug is still 200 million (next year). The probability of success is 30%, and the discount rate is 10%. Should you launch the drug today, or should you do additional research and wait until next year?

Answer:

  - Trade-off
  - Waiting will cost 10M (R&D cost) and reduce the NPV if the research is not sucessful.
  - The NPV will be increased from 200M to 250M if the research is sucessful.

figure 2.7.1: diagram of investment and NPV of the project.

  • Launch the drugs today : NPV = 200
  • Launch the drugs tomorrow : \(NPV = -10 + (30\% x 250 + 70\% x 200)/(1 + 10\%)\) = 185.4545455

2.8 Question 8

Question:

Consider the gold mine problem we discussed in the lecture notes. Your task is to show that if the cost of closing the gold mine is zero (we called this cost the “decomissioning cost”), then it will never make sense to wait a year to get more information about gold prices. There is no need to do math, a logical argument should suffice. But you can do math if you would like to.

Answer:

figure 2.8.1: diagram of profit and loss upon closing the gold mining business now.

figure 2.8.2: diagram of profit and loss upon closing the gold mining business next year.

  • If the cost of closing the mine is zero, then you would never wait.
  • The main benefit of waiting is zero loss if the gold price goes down.
  • Since the question doesn’t mention cost of setup gold mining business. Therefore we unable say close with zero loss and reopen is a good option.

2.9 Question 9

Question:

Explain why the option to wait is more valuable when investments are irreversible. (1 paragraph)

Answer:

  • Irreversible investment is very risky. Once the fund is invested, it can not be get the payback until completed the project.
  • Therefore for the irreversible investment, better waiting and observe and evaluate prior to inject the fund into the pool.

3. Conclusion

Below is the answer provided by lecturer. Kindly compare and watch as reference.

4. Appendices

4.1 Documenting File Creation

It’s useful to record some information about how your file was created.

[1] “2016-07-31 01:01:42 JST” setting value
version R version 3.3.1 (2016-06-21) system x86_64, mingw32
ui RTerm
language (EN)
collate English_United States.1252
tz Asia/Tokyo
date 2016-07-31
sysname release version nodename “Windows” “10 x64” “build 10586” “RSTUDIO-SCIBROK” machine login user effective_user “x86-64” “scibr” “scibr” “scibr”

4.2 Versions’ Log

4.3 Speech and Blooper

I do appreciate that University of Illinois at Urbana–Champaign provides the Improving Business Finances and Operations specialization via Coursera. I used to study Certified Accounting Technician (CAT) course at PAAC more more decade. Now I need to review the finance and accounting course prior to conduct my research Analyse the Finance and Stocks Price of Bookmakers.

There are few books below that I need to read for further understanding.

Managerial Accounting: Tools for Facilitating and Guiding Business Decisions : Module 1 Mini-Project

Managerial Accounting: Tools for Facilitating and Guiding Business Decisions : Module 1 Mini-Project

Improving Business Finances and Operations Specialization by University of Illinois at Urbana-Champaign

®γσ, Eng Lian Hu 白戸則道®

2016-07-07

1. Introduction

1.1 Instructions

1.1.1 Overview

There are multiple steps for this mini-project. First, you will submit your answers to the questions in Parts 1, 2, 3, and 4 based on the information in the Assignment Details section. Enter your answers directly in the spaces provided in the My submission tab. Please answer each question fully and concisely, including the steps of your calculations and/or citations as needed (you may use the library guidelines to citations as a guide). Then, you will evaluate the submission of at least four of your peers based on the instructions provided.

1.1.2 How to Use Peer Review

  1. Submit your own assignment. Click the My submission tab to begin working on your own assignment. You can save drafts of your work as you go, and you can come back later to continue working on your draft. When you are finished working, click the Preview button, verify your identity, and then Submit the assignment
  2. Give feedback to your peers. You are required to give feedback to at least four peers to complete this assignment. You can begin giving feedback to other students as soon as you submit your assignment. Click the Review peers tab to get started. Feel free to provide additional reviews beyond the four required!
  3. Read feedback from your peers. Your peers will also begin reviewing your project as soon as you submit it. You will receive an email notification of each new review. Only you will be able to see the feedback you receive. If you find someone’s review helpful, click the This review is helpful button to thank the reviewer.
  4. Browse other projects. You can browse through all of the submitted assignments, even if you don’t plan to review each one. Click the like button if you think someone did a great job on their assignment.

1.1.3 Assignment Details

For this project, you will actually be “creating” exercises. In fact, this is one of the most effective means by which true understanding of a concept or topic is demonstrated – when you show how to “test” this understanding.

Please choose two (different) common business decisions from those discussed in the Module 1 videos. These include:

  • Make or buy decisions
  • Keep or drop a product line, business unit, department, etc.
  • Retain or replace equipment, machinery, factory, etc.
  • Sell or process further
  • Accept a special order

Your Deliverable

Provide the following for each of the two decisions you choose:

Part 1: Describe a specific setting, the decision, decision alternatives, and any other information that would comprise an interesting and challenging problem.

Part 2: Create a “deliverable” list for the person who would be completing the problem. This deliverable list should be comprised of (at least) two calculations and (at least) one qualitative discussion deliverable (i.e., requiring explanation, additional considerations, etc.).

Part 3: In general, ensure that your exercise tests the person’s knowledge related to the use of relevant information in decision making. That is, your exercise should contain some relevant and some “irrelevant” information so that the person must distinguish between the two types of information.

Further, your exercise should allow a person to demonstrate their understanding related to at least two of the following items:

  • Opportunity costs
  • Sunk costs
  • Allocated fixed costs
  • Fixed-cost per unit information

Part 4: Finally, you should provide a solution for your exercise.

1.2 Review criteria

You will give a quantitative assessment of all parts of the submission. Then, you will provide qualitative feedback for the submission as a whole.

The following represents a guide for the quantitative assessments of Parts 1-4:

  • 0 points: No answer, completely irrelevant answer, inadequate material, and/or evidence does not fit the argument.
  • 5 points: Insufficient answer, incomplete, lacks supporting evidence. An insufficient response is incomplete or incorrect. For calculations, the response fails to provide supporting calculations/steps.
  • 7 points: Passing, meets expectations. A passing response addresses/answers the question, but some of the answer is not thoroughly explained. For calculations, the supporting calculations/steps are not clear.
  • 9 points: Well above average, exceeds expectations An above average response addresses/answers the entire question and most of the answer is thoroughly explained. For calculations, most of the supporting calculations/steps are clear, but there are some minor deficiencies.
  • 10 points: Superior performance, excellent. An excellent response answers the entire question, and thoroughly explains the answer. For calculations, all supporting calculations/steps are clearly presented.

Recommendations for Fair Peer Review:

  • The score should not be based on whether or not you agree with the answer, rather on whether the answer is complete and well-supported.
  • Both content and organization are important components of a response. Good writing is confident and clearly focused with relevant details to enrich the content. Good writing also follows instructions, such as word limits, and offers requested information.
  • A clear and concise answer is preferable to a long response that lacks coherence.
  • Focus should be on content; try not to unduly penalize responses for spelling or grammar.

1.3 Reminders

Using the Forums

Your fellow students are a great resource, and we encourage you to sharpen your ideas against them in the forums. You can post your arguments in the forums and receive feedback before submitting your assignment.

Honor Code

Please remember that you have agreed to the Honor Code, and your submission should be entirely yours. Our definition of plagiarism follows from standard literature: passing off someone else’s work as your own, whether from your peers or Wikipedia. If you need to quote material, remember to cite your source, for example: “But, as expressed by Spinoza, all things excellent are as difficult as they are rare (Baruch Spinoza,”Ethica" source: thinkexist.com)."

2. Case Study

Summary

In order to conduct the assignment, I try to using sportsbook industry business as my assignment. Football Form Labs, Star Lizard, SmartOdds1 You can refer to Reference 03 and reference 04 to know the background of the sportsbook consultancy firms as well as the founders. are famous sportsbook consultancy firms in sportsbook industry. I try to put myself into stand point of view as a StarLizarder since I used to used work in Telebiz which is a backend sportsbookmaker while taking bets from high rollers and Star Lizard is the one of crucial client.

However there has no financial report since there are private company. Here I try to take a public listed company which is GVC2 You can refer to Annual & Interim Reports (including Sportingbet and bwin.party) for more details. as an observation for the assignment. The company has made some successful acquisation and takeover activities since decade.

graph 2.1.1 : Acquisition history of GVC group

figure 2.1.1 : Acquisition history of GVC group

figure 2.1.1 : Acquisition history of GVC group

Health of bwin Party before Acquisition

By refer to Operations Management - Module 1: Operations Strategy by ®γσ, Eng Lian Hu 20163 Refer to Reference 06, we know the : - Asset Turnover Ratio - Operating Margin - Return On Equity (ROE)

Now we try to evaluate if the acquisition is worth or value buy (short term analysis, but acquisition is a long term business decision)? Due to the acquisition has just made less than one year therefore we have inssuficient data and information for analyse. Here I try to refer to quarterly report as short term analysis.

Firstly, we review the annual financial statement of bwin.party digital entertainment from year 2010 to year 2014.

table 2.1.1 : Annual financial statement of bwin Party from year 2010 to 2014.

By refer to above table, we try to evaluate the company’s health.

Asset Turnover Ratio

Table 2.1.2: Asset Turnover Ratio (Year 2010 - 2014)

Assets (€m) 2014 2013 2012 2011 2010
Turnover 611.9 652.4 801.6 691.1 357.3
Net Assets 565.0 677.6 668.9 793.5 233.0
Asset Turnover Ratio 108.3% 96.28% 119.84% 87.1% 153.35%

table 2.1.2 : Asset turnover ratio of bwin Party from year 2010 to 2014.

Operating Margin

Table 2.1.3: Operating Margin (Year 2010 - 2014)

Assets (€m) 2014 2013 2012 2011 2010
Turnover 611.9 652.4 801.6 691.1 357.3
Operating Profit (97.9) 51.9 (16.5) (419.7) 46.3
Operating Margin -16% 7.96% -2.06% -60.73% 12.96%

table 2.1.3 : Operating margin of bwin Party from year 2010 to 2014.

Return On Equity (ROE)

Table 2.1.4: Return On Equity (Year 2010 - 2014)

Assets (€m) 2014 2013 2012 2011 2010
Total Equity 565.00 677.60 668.90 793.50 233.00
Operating Profit (97.9) 51.9 (16.5) (419.7) 46.3
Return On Equity (ROE) -17.33% 7.66% -2.47% -52.89% 19.87%

table 2.1.4 : Return on equity of bwin Party from year 2010 to 2014.

Summary

Table 2.1.5: Financial Analysis (Year 2010 - 2014)

Assets (€m) 2014 2013 2012 2011 2010
Asset Turnover Ratio 108.3% 96.28% 119.84% 87.1% 153.35%
Operating Margin -16% 7.96% -2.06% -60.73% 12.96%
Return On Equity (ROE) -17.33% 7.66% -2.47% -52.89% 19.87%

table 2.1.5 : Financial analysis of bwin Party from year 2010 to 2014.

From the table above, we observed that the asset turnover ratio fluctuates after 2010. Besides, the operating margin represents the cost management is not efficient. After that, the ROE ratio similar with asset turnover ratio which is not stable. We can know there might be some unexpected issues to cause the stability of growth of the business of bwin Party is bad. However the GVc dicided to takeover and reported generates profit within last quarter in year 2015 prior to acquisition4 Kindly read the article bwin.party reports revenue growth in fourth quarter and Bwin.Party has good fourth quarter before GVC takeover. Let’s look at the financial report of year 2015 in order to know more details as in Report of the Chief Executive.

figure 2.1.2 : Report of CEO of GVC business group 01

figure 2.1.2 : Report of CEO of GVC business group 01

We observed that the Sports wager has been increased 15% from EUR1.5 billion to EUR1.7 billion from 2014 to 2015 and the Net Gaming Revenue incaresed 10% from 225 million to 248 million. However the operating profit decreased 35% which was from EUR42.9 million to EUR27.7 million. The CEO has declared the one among the challenges for 2016 is the re-energize the bwin Party into the GVC group to drive cost synergies and revenue opportunities.

figure 2.1.3 : Report of CEO of GVC business group 02

figure 2.1.3 : Report of CEO of GVC business group 02

Above 1st table shows the revenue of bwin Party is EUR562.1 million compare to GVC group’s EUR247.7 million which is more than double. The sports margin gain around 9% from wagers. We can know the business size of bwin Party is greater than GVC. 2nd and 3rd tables display the average wager per day in 1st quarter of 2016 and 2015. The average stakes per day increase 180% compare to year 2015. You can refer to Preliminary Results for year ended 31 December 2015 - 2016 Trading Update for more details.

Part 1

For each of the two decisions you choose:

Describe a specific setting, the decision, decision alternatives, and any other information that would comprise an interesting and challenging problem.

1 Make or buy decisions

Based on above section, we know that the Net Gaming Revenue increases but there has no profit declared, secondly there has just only an quarter after acquisition, therefore we unable to conclude that the acquisition is worth in short term. Below information is required in order to determine if the acquisition is worth or not: - The breakdown financial statement between GVC and bwin Party in order to differentiate the ROI on GVC. GVC can dicide either expand its existing Sportingbet or takeover bwin Party. - The interim report doesn’t content financial statement in cost and also profit breakdown. - Besides, we can refer to page 9 inside Preliminary Results for year ended 31 December 2014, Trading Update for period from 1 January 2015 to 18 March 2015 which summarise the cash flow on acquisition activities. The cash flow and liabilities of the company need to be considered prior to conduct an acquisition decision.

2016 Trading Update

  • Q1-2016 Total Group NGR at EUR167.7 million, up 180% (Q1-2015: EUR60.0 million) following the acquisition of bwin.party on 1 February 2016.
  • Q1-2016, like-for-like, constant currency basis, average NGR per day, up 9%
  • Year to 20 April 2016, like-for-like, constant currency basis, average NGR per day increases were:
    • Group: +13%
    • GVC brands: +18%
    • Bwin.party brands: +11%
  • PartyPoker shows first year on year quarterly growth for five years
  • On track to secure €125 million of synergies by the end of 2017 from enlarged GVC

Financial position

  • Gross cash position as at 17 April EUR327 million
  • Group net debt*** as at 17 April EUR193 million

Although the 2016 interim reports do not state the breakdown, however you can try to refer to year 2015.

figure 2.2.1 : 1st Qusrter Interim Report 2015 of bwin Party

figure 2.2.1 : 1st Qusrter Interim Report 2015 of bwin Party

figure 2.2.1 : Half Year Report 2015 of bwin Party

figure 2.2.1 : Half Year Report 2015 of bwin Party

You can refer to AGM trading update and Q1 2015 key performance indicators and Unaudited results for the six months ended 30 June 2015 for more details.

2 Keep or drop a product line, business unit, department, etc.

figure 2.2.1 : Income statement of year 2013 to 2015.

figure 2.2.1 : Income statement of year 2013 to 2015.

Let us look at the key financial statement above regarding bwin Party 2013, 2014 and 2015 to know the income generates from online gaming and sportsbook. The revenue generates from online gaming is greater than sportsbook while both increasing beyond the year.

However below article descript which sportsbook increase but the other online games declined in revenue.

  Sport betting revenue increase by 1% although Casino & games, poker and bingo revenues declined, with poker revenues taking a massive 29% hit. Pulling out of Greece and “challenging conditions in several markets” were blamed for poker’s poor performance...

You can refer to Bwin.party digital entertainment plc Posts €97.9 Million Loss for more details.

Well, now we try to summarise if both online gaming and sportsbook business should be kept or dropped? Then the question come again due to insufficient information about independent cost and profit listing on both. Secondly, above financial statement states an exceptional item element which cost to company. We unable to know the profit generates seperately from both. Therefore I try to conclude that based on the limited information, both business should keep operating in year 2014 and then we try to compare to the revenue of year 2015.

Part 2

For each of the two decisions you choose:

Create a “deliverable” list for the person who would be completing the problem. This deliverable list should be comprised of (at least) two calculations and (at least) one qualitative discussion deliverable (i.e., requiring explanation, additional considerations, etc).

1 Make or buy decisions

When we talk about the calculation, there has insufficient information about the cost and profit breakdown for both individual sportsbook and online gaming departments. Here we can try to refer to Summary section in 2.1 (before section Part 1) for bwin Party business before acquisition. Then Part 1 eleborate the insifficient information to judge.

However we can refer to below video which has eleborate there must be profitable in order to make an acquisition. - The profit generates must be able to growth and more than the cost of acquisition. - There might probably resizing employees upon acquisition to cut cost. For example traders, customer service and also financial department might united to handle both Sportingbet and bwin Party.5 I am the one among the traders used to monitor few brands when I worked in Telebiz and Caspo. For example: SB1888 and 188Bet or Singbet1 and Singbet3, AS3388 and RCM - Sharing technology like platform, service and tools. Some products or technology might be fully utilised accross two brands.

For example :

Table 2.3.1: Comparison of the Benefit of Merging

Category ComA ComB Combine Merge Diff
Customers 1200000 600000 1800000 2000000 -200000
Website & Server 100000 80000 180000 200000 -20000
Cost to Acquire a New Customer 200 400 600 200 400
Labor Cost 575000 33000 608000 585000 23000
Admin Cost 500000 50000 550000 510000 40000
Overhead 260000 23000 283000 265000 18000

table 2.3.1 : Example of merging.

From above table, we can know the basic cost of Company A and Comapny B, and Combined Figure is the lump sum figure of both company, Merged Company is the cost after merging, Difference is the cost save/waste upon takeover. After merge, there will not only lump sum the number of customer for the business group but also allowed customers to register account at another partner website.

Besides, the advertisement cost will be save since both sister-companies can promote to each other. The cost of acquire a new customer keep $200 after takeover which has saved cost. The labor cost and overhead can be saved due to resizing employees and daily expense or rental can be saved upon work in same office or branches. The server might probably upgrade upon invest some fund for long term use, but the data of customers and also stakes might link which easier to handle by employees (example: traders, customer service executives etc.).

  • Customers number = additional 200000 upon takeover (since the customers from company website A might also auto awarded an account at company website B, geographical customers might enjoy different website which under same business group. For example: Sportingbet is a British company but bwin is an Austrian company but both under GVC. Let say British customers who familiar with bwin website will able to choose bwin but not only existing Sportingbet website. Some customers who are soccer fans always watching soccer matches will know bwin from advertisement of Real Madrid famous club etc. can also get an account of Sportingbet.)
  • Website & server cost = additional 20000 (but linked the database of customers migh easier for GVC group. Especially similar with Macrogaming, easily handle anti-fraud and arbitrage activities among both websites.)
  • Saved cost of acquire a new customer = 400 (saved cost. For example customers of Sportingbet will automatically awarded an account on bwin and verce vice.)
  • Saved labor cost = 23000
  • Saved admin cost = 40000
  • Saved overhead cost = 18000

2 Keep or drop a product line, business unit, department, etc.

Similar with previous topic which is insufficient information to proof if casino & games, sportsbook, poker, bingo making profit and cost listing independently. An organization might decide to close a department which was not profitable.

For example :

Table 2.3.2: Department Breakdown of Company C

Category Sportsbook Casino & Gaming Poker Horse Racing
Revenue 800000 300000 100000 250000
Variable Cost 520000 210000 90000 190000
Fixed Cost 80000 50000 30000 40000
Operating Profit 200000 40000 -20000 20000

table 2.3.2 : Example of division breakdown of company C.

  • Total profit = 2.410^{5}
  • Total revenue loss = -100000
  • Saved Variable Cost = 90000
  • Saved Variable Cost = 30000
  • Total Saved Cost = 2.610^{5}

Part 3

For each of the two decisions you choose:

In general, ensure that your exercise tests the person’s knowledge related to the use of relevant information in decision making. That is, your exercise should contain some relevant and some “irrelevant” information, so that the person must distinguish between the two types of information. Further, your exercise should allow the person to demonstrate their understanding related to at least two of the following items:

  • Opportunity costs
  • Sunk costs
  • Allocated fixed costs
  • Fixed-cost per unit information

1 Make or buy decisions

  • Opportunity costs
    • The decision of acquisition bwin Party is an opportunity cost before they invest the fund for takeover the company since they can acquire other companies or use the fund to expand existing Sportingbet’s business.
  • Sunk costs
    • When GVC decide to takeover Sportingbet and signed the agreement. All the payment will became sunk costs if GVC want to terminate the agreement with penalty fees. You can read the article GVC Hldgs Takeover Rumours (GVC) to know the stock price blooming 2 times from February. There is another article Online betting company Bwin accepts GVC takeover bid but there is another decision Accept a special order or Sell or process further which is decided by Sportingbet.

2 Keep or drop a product line, business unit, department, etc.

  • Opportunity costs
    • The choice of either keep operates or close the department which made loss constantly.
    • We can know from table 2.3.2 which is Poker game (product) made loss, however we need to observe if it is made loss constantly accross few quarter, the cost management factor as well as if it is due to product quality or unprofessional/unskillful of anti-faud team. (For example: I temporarily closed my server to save cost as I have quite some short term debt which need to be settle within 1 year. Meanwhile the studying fees is an opprtunity for me as well which is option to me for self improve.)
  • Sunk costs
    • If the company C decide to close Poker business, then the cost spent will became sunk costs. (For example: when we purchased a movie ticket but we didn’t attend to watch the movie, then the cost will became sunk cost since the ticket is not refundable.)
    • If the Poker product is constantly make profit accross the years but only made loss in specific quarter, then it will be another issue while accounting department need to breakdown all revenue and costs spent throughly.

Part 4

Finally, provide a solution for your exercise.

From the case study for GVC and bwin Party. The income statement after acquisition shows a negative operating profit figure where the CEO’s report declared that the cost synergy is one of crucial action need to implement. From the history statement which is from 2010 to 2014, bwin Party is keeping making loss on opearing profit before sell to GVC, and now made loss after acquisition but the revenue is keeping increase every year. Therefore we can concludes that the problem is with the cost management as declared in CEO’s report as well.

With regards to Part 3, I simply made an example of company with a ramdom figure to eleborate about the profitable/unprofitable business and decision making.

3. Conclusion

I completed the assignment based on my limited knowledge. Due to the quarter financial report of GVC doen’t provides a breakdown profit and loss (P&L) of every single division simlir with figure 2.2.1, we unable to judge and make a brilliant and efficient business decision.

As mentioned in section [Speech and Blooper], I need to self improve in financial statement analysis section but also products my research Analyse the Finance and Stocks Price of Bookmakers.

4. Appendices

4.1 Documenting File Creation

It’s useful to record some information about how your file was created.

[1] “2016-07-07 15:40:15 JST” setting value
version R version 3.3.1 (2016-06-21) system x86_64, mingw32
ui RTerm
language (EN)
collate English_United States.1252
tz Asia/Tokyo
date 2016-07-07
sysname release version nodename “Windows” “10 x64” “build 10586” “RSTUDIO-SCIBROK” machine login user effective_user “x86-64” “scibr” “scibr” “scibr”

4.2 Versions’ Log

4.3 Speech and Blooper

I do appreciate that University of Illinois at Urbana–Champaign provides the Improving Business Finances and Operations specialization via Coursera. I used to study Certified Accounting Technician (CAT) course at PAAC more more decade. Now I need to review the finance and accounting course prior to conduct my research Analyse the Finance and Stocks Price of Bookmakers. There are few books that I need to read for further understanding. - Managerial Accounting - Financial Statement A Step-by-Step Guide to Understanding and Creating Financial Reports by Thomas R. Ittelson 2009

The biggest driver of sales growth was Bwin's sports betting and casino operations. That will reassure GVC investors because the company plans to move its sports punters onto Bwin’s betting platform following the acquisition, which is officially due to complete on February 1...

I can access Sporting.com yesterday on 06-Jul-2016 but not today. Believed that is because of wizards. You can refer to Bwin returns to growth as GVC takeover nears completion for more details.

Managerial Accounting: Tools for Facilitating and Guiding Business Decisions : Module 2 Mini-Project

Managerial Accounting: Tools for Facilitating and Guiding Business Decisions : Module 2 Mini-Project

Improving Business Finances and Operations Specialization by University of Illinois at Urbana-Champaign

®γσ, Eng Lian Hu 白戸則道®

2016-07-29

1. Introduction

1.1 Instructions

1.1.1 Overview

There are multiple steps to this mini-project. First, you will submit your answers to the questions in Parts 1, 2, and 3 based on the information in the Assignment Details section. Enter your answers directly in the spaces provided in the My submission tab. Please answer each question fully and concisely, including the steps of your calculations and/or citations as needed (you may use the library guidelines to citations as a guide). Then, you will evaluate the submission of at least four of your peers based on the instructions provided.

1.1.2 How to Use Peer Review

  1. Submit your own assignment. Click the My submission tab to begin working on your own assignment. You can save drafts of your work as you go, and you can come back later to continue working on your draft. When you are finished working, click the Preview button, verify your identity, and then Submit the assignment

  2. Give feedback to your peers. You are required to give feedback to at least four peers to complete this assignment. You can begin giving feedback to other students as soon as you submit your assignment. Click the Review peers tab to get started. Feel free to provide additional reviews beyond the four required!

  3. Read feedback from your peers. Your peers will also begin reviewing your project as soon as you submit it. You will receive an email notification of each new review. Only you will be able to see the feedback you receive. If you find someone’s review helpful, click the This review is helpful button to thank the reviewer.

  4. Browse other projects. You can browse through all of the submitted assignments, even if you don’t plan to review each one. Click the like button if you think someone did a great job on their assignment.

1.1.3 Assignment Details

Cut Here, Inc. is considering a new video rendering system for their in-house studio. Currently, there are two options. Each option involves a significant investment in an asset that has a multi-year useful life. The key benefits of each option are cash savings, which Cut Here equates to cash inflows (i.e., compared to the status quo scenario, in which it incurs significant costs in terms of labor, time, etc.).

The following cash flow information is available for each option:

table 1.1.3.1: Cash flow of Cut Here Inc. beyond 6 years.

Your Deliverable:

Part 1: Use the following measures to assess the two options from a financial perspective. That is, compute the following measures for each option.

  • Payback
  • Accounting rate of return
  • Net present value
  • Internal rate of return

Part 2: Based on what you calculated in Part 1, which option would you recommend to Cut Here management?

Part 3: Describe some of the strengths and weaknesses of your analysis (i.e., specific measures, etc.). Also, what other considerations might influence your recommendation?

1.2 Review criteria

You will give a quantitative assessment of all parts of the submission. Then, you will provide qualitative feedback for the submission as a whole.

The following represents a guide for the quantitative assessment of Part 1-3:

  • 0 points: No answer, completely irrelevant answer, inadequate material, and/or evidence does not fit the argument.
  • 5 points: Insufficient answer, incomplete, lacks supporting evidence. An insufficientresponse is incomplete or incorrect. For calculations, the response fails to provide supporting calculations/steps.
  • 7 points: Passing, meets expectations. A passing response addresses/answers the question, but some of the answer is not thoroughly explained. For calculations, the supporting calculations/steps are not clear.
  • 9 points: Well above average, exceeds expectations. An above average response addresses/answers the entire question and most of the answer is thoroughly explained. For calculations, most of the supporting calculations/steps are clear, but there are some minor deficiencies.
  • 10 points: Superior performance, excellent. An excellent response answers the entire question, and thoroughly explains the answer. For calculations, all supporting calculations/steps are clearly presented.

Recommendations for Fair Peer Review:

  • The score should not be based on whether or not you agree with the answer, rather on whether the answer is complete and well-supported.
  • Both content and organization are important components of a response. Good writing is confident and clearly focused with relevant details to enrich the content. Good writing also follows instructions, such as word limits, and offers requested information.
  • A clear and concise answer is preferable to a long response that lacks coherence.
  • Focus should be on content; try not to unduly penalize responses for spelling or grammar.

1.3 Reminders

Using the Forums

Your fellow students are a great resource, and we encourage you to sharpen your ideas against them in the forums. You can post your arguments in the forums and receive feedback before submitting your assignment.

Honor Code

Please remember that you have agreed to the Honor Code, and your submission should be entirely yours. Our definition of plagiarism follows from standard literature: passing off someone else’s work as your own, whether from your peers or Wikipedia. If you need to quote material, remember to cite your source, for example: “But, as expressed by Spinoza, all things excellent are as difficult as they are rare (Baruch Spinoza,”Ethica" source: thinkexist.com)."

2. Case Study

2.1 Part 1

Cut Here, Inc. is considering a new video rendering system for their in-house studio. Currently, there are two options. Each option involves a significant investment in an asset that has a multi-year useful life. The key benefits of each option are cash savings, which Cut Here equates to cash inflows (i.e., compared to the status quo scenario, in which it incurs significant costs in terms of labor, time, etc.).

Use the cash flow information provided in the Assignment Details section of the Instructions tab.

Then, use the following measures to assess the two options from a financial perspective. That is, compute the following measures for each option.

  • Payback
  • Accounting rate of return
  • Net present value
  • Internal rate of return

2.1.1 Payback

table 2.1.1: Payback cash flow of Cut Here Inc. beyond 6 years.

  • Payback A has turned to be positive return at Year 4, therefore we using last negative figure Year 3 + 20000 ÷ 70000 = 3.2857143 years.

  • Payback B has turned to be positive return at Year 6, therefore we using last negative figure Year 5 + 223000 ÷ 390000 = 5.5717949 years.

2.1.2 Accounting Rate of Return

table 2.1.2: ARR cash flow of Cut Here Inc.

\[\frac{Outflow - \sum_{n = 6}^{i = 1,2,3...}Saving}{Outflow}\]

equation 2.1.1: Accounting Rate of Return

  • ARR for Option A = 63.33%
  • ARR for Option B = 38.93%

2.1.3 Net present value

table 2.1.3: NPV cash flow of Cut Here Inc.

What is ‘Internal Rate Of Return - IRR’

Internal rate of return (IRR) is a metric used in capital budgeting measuring the profitability of potential investments. Internal rate of return is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. IRR calculations rely on the same formula as NPV does.

Read more: Internal Rate Of Return (IRR) Definition | Investopedia

From table 2.1.3, we know that the annual return rate for 16% as below. You can also know 13% (NPV.A.13 and NPV.B.13) from the table.

  • NPV for Option A = 39445.83 - 1e+05 = -60554.17.
  • NPV for Option B = -75582.6 - 250000 = -325582.6.

2.1.4 Internal Rate of Return

To calculate IRR using the formula, one would set NPV equal to zero and solve for the discount rate r, which is here the IRR. Because of the nature of the formula, however, IRR cannot be calculated analytically, and must instead be calculated either through trial-and-error or using software programmed to calculate IRR.

Read more: Internal Rate Of Return (IRR) Definition | Investopedia or Internal Rate of Return (IRR) for further details.

What is the ‘IRR Rule’?

A measure for evaluating whether to proceed with a project or investment. The IRR rule states that if the internal rate of return (IRR) on a project or investment is greater than the minimum required rate of return – the cost of capital – then the decision would generally be to go ahead with it. Conversely, if the IRR on a project or investment is lower than the cost of capital, then the best course of action may be to reject it.

BREAKING DOWN ‘IRR Rule’ The higher the IRR on a project and the greater the amount by which it exceeds the cost of capital, the higher the net cash flows to the investor. In general terms, a company that has to choose one, among several similar projects with equivalent degrees of risk, may go with the one that provides the highest IRR.

The IRR rule is one among a number of rules used to evaluate projects in capital budgeting. However, it may not always be rigidly enforced. For example, a company may prefer a project with a lower IRR over one with a higher IRR because the former provides other intangible benefits such as being part of a bigger strategic plan or impeding competition. A company may also prefer a larger project with a lower IRR to a much smaller project with a higher IRR, because of the higher cash flows generated by the larger project.

Read more: IRR Rule Definition | Investopedia]

  • IRR for Option A = 28% (We can know the from the row balance inside table 2.1.3 is nearest to 0 compare to other rates)1 You can apply FinCal::irr() in package FinCal to calculate the IRR.
  • IRR for Option B = 9% (We can know the from the row balance inside table 2.1.3 is nearest to 0 compare to other rates)2 You can apply FinCal::irr() in package FinCal to calculate the IRR.

2.2 Part 2

Based on what you calculated in Part 1, which option would you recommend to Cut Here management?

  • Payback for project A is 3.29 Years and 5.57 years for project B. Means that the cost invested on project A will be even on 3.29 years and begin make money after that.
  • Accounting Rate of Return for project A is 23.33% and project B is 11.13%. Since the average return for project A across 6 years around 23.33% and it is better than project B.
  • NPV for project A is favor and profitable investment, but for project B is not a profitable investment since a big portion of return will be cash in in the 6th years.
  • IRR for project A is higher than project B, therefore it is more preferable to investors. The higher the IRR on a project and the greater the amount by which it exceeds the cost of capital, the higher the net cash flows to the investor.3 You can refer to 2.1.4 Internal Rate of Return for more details.

A health cashflow need to be smoothly and project A can make it, while the project B will faced cash flow problem and might looking for loan from bank before 6th year (if that is an opprtunity cost for company which is the company has no extra cash).

From the project A, we can conclude that it is profitable from a short term period. The project B might probably a very huge project, for example a telecomunication company might invest a huge fund but there will be a profitable project for long term. Who knows year 7 will generates millions return? For example, George Soros and a lot of hedge fund will using few years time to observe and make an unexpected high return during financial crisis once.

As a businessman, project A will be faster to make profit, and will not face a tigh cashflow problem compare to project B, and it is worth to invest unless the businessman has sufficient fund for cashflow before year 6, then it will be different story.

2.3 Part 3

2.3.1 Payback Time

  • Advantages
    • Payback time is measuring about the time to recover the cost invested on a project prior to make profit.
    • Risk indicator, the longer time taken to get the money back from investment, the higher risk of uncertainty.
  • Disadvantages
    • Doesn’t measure the time value of money.
    • Doesn’t shows the cash flow.
    • Doesn’t shows the profitability rate.

2.3.2 Accounting Rate of Return

  • Advantages
    • Accounting based report to calculate the rate of return
  • Disadvantages
    • Normally apply quarterly or annually.
    • Cash basis might not accurate.

2.3.3 Net Present Value

  • Advantages
    • Time value of money take into account. It is useful especially for long-term project.
    • Cash basis.
    • Allow to compare the future cash flow onto today’s value.
    • NPV tell us how much will payback accross the years after counting the time value of money.
  • Disadvantages
    • Normally annum rate basis might not accurate as daily basis.
    • Assumption can lead to different results.
    • Inflation rate might need to consider.
    • Uncertainty.

2.3.4 Internal Rate of Return

  • Advantages
    • Measure if the investment is worth or not before take action.
    • Time value of money take into account. It is useful especially for long-term project.
  • Disadvantages
    • Uncertainty.
    • Inflation rate might need to consider.

2.3.5 Other Factors

With merely consider of cashflow issue, invest in project A is better than project B. However it is depends on the size of invested project as well.

Secondly, Kodak and FujiFilm, Nokia and Siemens are samples in their industry which was dropped in business revenue after launch of Apple iPhone with multiple functions not only phone calls but also includes digital camera, photo, video, online and also apps. The decision making, and research and development need to be considered as well.

Thirdly, the turnover of staffs might be another factor. Since the training cost for replace existing skilled staffs might be a sunk cost paid on the resigned/sacked employees. Jack Welch is a management guru who always emphasize on quality. Research and development is the core of business of GE to keep as one of leading company in the World.

Jack Welch

Jack Welch

Jack Welch Quote

Jack Welch Quote

Fourthly, the risk of political barriers and social, environment etc. are other risks that we need to consider.

3. Conclusion

2.3 Part 3 has concludes the assignment. However there has a lot of factors we need to take into consideration but not merely on accounting figures.

You might refer to below reference as well.

## Cumulative Cash Flow

                  Option A  Option B  Option A  Option B
Immediate outflow $100,000  $250,000  $100,000  $250,000
Cash Savings
Year 1            10,000    1,000     (90,000)  (249,000)
Year 2            50,000    2,000     (40,000)  (247,000)
Year 3            20,000    3,000     (20,000)  (244,000)
Year 4            70,000    1,000     50,000    (243,000)
Year 5            80,000    20,000    130,000   (223,000)
Year 6            10,000    390,000   140,000   167,000

## Part 1

Payback Option A:
Payback = 3+(20,000/70,000) = 3.29  Years

Option B:
Payback = 6 + (167,000/223,000) = 6.75  Years

ARR Option A:
ARR = 140,000/100,000 = 140%

Option B:
ARR = 167,000/250,000= 0.67%

NPV
Assuming the discount rate = 0

Present Value (in thousands unit)
      Option A      Option B     Option A Option B
T=0   -100/(1+0)^0  -250/(1+0)^0 (100)    (250)
T=1   10/(1+0)^1    1/(1+0)^1    10       1
T=2   50/(1+0)^2    2/(1+0)^2    50       2
T=3   20/(1+0)^3    3/(1+0)^3    20       3
T=4   70/(1+0)^4    1/(1+0)^4    70       1
T=5   80/(1+0)^5    20/(1+0)^5   80       20
T=6   10/(1+0)^6    390/(1+0)^6  10       390
NPV                              140      167

IRR

Option A:
IRR = -100,000+(10,000/(1+r)^1)+(50,000/(1+r)^2)+(20,000/(1+r)^3)+(70,000/(1+r)^4)+(80,000/(1+r)^5)+(10,000/(1+r)^6)=0
= 0.2781 = 27.81%

Option B:
IRR = -250,000+(1,000/(1+r)^1)+(2,000/(1+r)^2)+(3,000/(1+r)^3)+(1,000/(1+r)^4)+(20,000/(1+r)^5)+(390,000/(1+r)^6)=0
= 0.0909 = 9.09%

## Part 2

According to the above, it would recommend Option A to Cut Here.

## Part 3

Strength Weakness

  - Payback Simple and easily understand The Present Value of money does not include for the consideration
  - ARR Simple and easily understand The Present Value of money does not include for the consideration
  - The cash flow of each year does not include for the consideration
  - NPV "The Present Value of money includes for the consideration" The size of the project does not include for consideration.
  - "The cash flow of each year includes for the consideration"
  - IRR "The Present Value of money includes for the consideration" Difficult for the determination and understand
  - "The cash flow of each year includes for the consideration" Only base on one assumption
  - As there is no interest rate given to compute the NPV and IRR, so the value of those cannot be deteremine accurately.

As mentioned in section [Speech and Blooper], I need to self improve in financial statement analysis section but also products my research Analyse the Finance and Stocks Price of Bookmakers.

4. Appendices

4.1 Documenting File Creation

It’s useful to record some information about how your file was created.

[1] “2016-07-29 00:45:53 JST” setting value
version R version 3.3.1 (2016-06-21) system x86_64, mingw32
ui RTerm
language (EN)
collate English_United States.1252
tz Asia/Tokyo
date 2016-07-29
sysname release version nodename “Windows” “10 x64” “build 10586” “RSTUDIO-SCIBROK” machine login user effective_user “x86-64” “scibr” “scibr” “scibr”

4.2 Versions’ Log

4.3 Speech and Blooper

I do appreciate that University of Illinois at Urbana–Champaign provides the Improving Business Finances and Operations specialization via Coursera. I used to study Certified Accounting Technician (CAT) course at PAAC more more decade. Now I need to review the finance and accounting course prior to conduct my research Analyse the Finance and Stocks Price of Bookmakers. There are few books that I need to read for further understanding. - Managerial Accounting - Financial Statement A Step-by-Step Guide to Understanding and Creating Financial Reports by Thomas R. Ittelson 2009

4.4 References

  1. NA

Managerial Accounting: Tools for Facilitating and Guiding Business Decisions : Module 3 Mini-Project

Managerial Accounting: Tools for Facilitating and Guiding Business Decisions : Module 3 Mini-Project

Improving Business Finances and Operations Specialization by University of Illinois at Urbana-Champaign

®γσ, Eng Lian Hu 白戸則道®

2016-07-27

1. Introduction

1.1 Instructions

1.1.1 Overview

There are multiple steps to this mini-project. First, you will submit your answers to the questions in Parts 1, 2, and 3 based on the information in the Assignment Details section. Enter your answers directly in the spaces provided in the My submission tab. Please answer each question fully and concisely, including the steps of your calculations and/or citations as needed (you may use the library guidelines to citations as a guide). Then, you will evaluate the submission of at least four of your peers based on the instructions provided.

1.1.2 How to Use Peer Review

  1. Submit your own assignment. Click the My submission tab to begin working on your own assignment. You can save drafts of your work as you go, and you can come back later to continue working on your draft. When you are finished working, click the Preview button, verify your identity, and then Submit the assignment

  2. Give feedback to your peers. You are required to give feedback to at least four peers to complete this assignment. You can begin giving feedback to other students as soon as you submit your assignment. Click the Review peers tab to get started. Feel free to provide additional reviews beyond the four required!

  3. Read feedback from your peers.Your peers will also begin reviewing your project as soon as you submit it. You will receive an email notification of each new review. Only you will be able to see the feedback you receive. If you find someone’s review helpful, click the This review is helpful button to thank the reviewer. Browse other projects. You can browse through all of the submitted assignments, even if you don’t plan to review each one. Click the like button if you think someone did a great job on their assignment.

1.1.3 Assignment Details

1.1.3.1 Part 1: Cost Variances

Flatland, Inc. produces small machine parts for industrial use in a single plant. The plant manager recently received the following performance report for his plant for the most recent month.

table 1.1.3.1: financial statememt of Flatland Inc.

There were no beginning or ending inventories. The standard (budgeted) information available is as follows:

  • Direct materials: 1.5 kilograms per unit
  • Direct labor: 1/2 DL hour per unit
  • Labor wages: $7 per hour

The following actual data were collected:

  • Direct materials used: 8,250 kilograms
  • Direct labor hours worked: 2,850 hours

Additional information:

  • You should ignore income taxes.
  • Fixed costs include allocations of various costs, including managers’ and VPs’ salaries, and depreciation.

Required:

  1. For both direct material and direct labor costs, calculate the spending, efficiency, and activity variances. Please provide supporting calculations, label your variances by name, and designate them as favorable or unfavorable. Note: If the given information is insufficient for answering any part of the above question, please denote that clearly, and identify the piece of information you are missing.

  2. Provide a brief statement demonstrating your knowledge of the difference between a favorable and an unfavorable variance.

  3. Provide at least two potential explanations for each of the variances (i.e., six) that you calculate. If you were to investigate these variances, who would you speak to in order to collect information relevant to your investigation?

1.1.3.2 Part 2: Revenue Variances

The XTRA Appliance Manufacturing Corporation manufactures two models of vacuum cleaners, the Standard and the Super. The following information was gathered about the two products:

table 1.1.3.2: products’ budget statememt of XTRA Appliance Manufacturing Corporation.

Required:

  1. Calculate the revenue variances (sales price, sales mix, and sales activity) for both the Standard and Super models. Please provide supporting calculations, label your variances by name, and designate them as favorable or unfavorable. Note: If the given information is insufficient for answering any part of the above question, please denote that clearly, and identify the piece of information you are missing.

  2. Provide at least two potential explanations for each of the variances (i.e., six) that you calculate. If you were to investigate these variances, who would you speak to in order to collect information relevant to your investigation?

1.2 Review criterialess

You will give a quantitative assessment of all parts of the submission. Then, you will provide qualitative feedback for the submission as a whole.

The following represents a guide for the quantitative assessment of Part 1-3:

  • 0 points: No answer, completely irrelevant answer, inadequate material, and/or evidence does not fit the argument.
  • 5 points: Insufficient answer, incomplete, lacks supporting evidence. An insufficientresponse is incomplete or incorrect. For calculations, the response fails to provide supporting calculations/steps.
  • 7 points: Passing, meets expectations. A passing response addresses/answers the question, but some of the answer is not thoroughly explained. For calculations, the supporting calculations/steps are not clear.
  • 9 points: Well above average, exceeds expectations An above average response addresses/answers the entire question and most of the answer is thoroughly explained. For calculations, most of the supporting calculations/steps are clear, but there are some minor deficiencies.
  • 10 points: Superior performance, excellent. An excellent response answers the entire question, and thoroughly explains the answer. For calculations, all supporting calculations/steps are clearly presented.

Recommendations for Fair Peer Review:

  • The score should not be based on whether or not you agree with the answer, rather on whether the answer is complete and well-supported. Both content and organization are important components of a response. Good writing is confident and clearly focused with relevant details to enrich the content. Good writing also follows instructions, such as word limits, and offers requested information.
  • A clear and concise answer is preferable to a long response that lacks coherence.
  • Focus should be on content; try not to unduly penalize responses for spelling or grammar.

1.3 Reminders

Using the Forums

Your fellow students are a great resource, and we encourage you to sharpen your ideas against them in the forums. You can post your arguments in the forums and receive feedback before submitting your assignment.

Honor Code

Please remember that you have agreed to the Honor Code, and your submission should be entirely yours. Our definition of plagiarism follows from standard literature: passing off someone else’s work as your own, whether from your peers or Wikipedia. If you need to quote material, remember to cite your source, for example: “But, as expressed by Spinoza, all things excellent are as difficult as they are rare (Baruch Spinoza,”Ethica" source: thinkexist.com)."

2. Case Study

2.1 Part 1: Cost Variances

Question:

Using the information provided in the Assignment Details section of the Instructions tab, respond to the following:

  1. For both direct material and direct labor costs, calculate the spending, efficiency, and activity variances. Please provide supporting calculations, label your variances by name, and designate them as favorable or unfavorable. Note: If the given information is insufficient for answering any part of the above question, please denote that clearly, and identify the piece of information you are missing.
  1. Provide a brief statement demonstrating your knowledge of the difference between a favorable and an unfavorable variance.
  1. Provide at least two potential explanations for each of the variances (i.e., six) that you calculate. If you were to investigate these variances, who would you speak to in order to collect information relevant to your investigation?

Answer:

2.1.1 Answer 1

table 2.2.1: financial statement of Flatland Inc.

By refer to 1.1.3.1 Part 1: Cost Variances, we calculate and get below answer:

  • Produced Units: Budgeted 6,000 units produced but only 5,500 units produced in real operations.
  • Cost of Materials: 5,500 units x 1.5 kg per unit = 8,250 kg is similar with 6,000 units x 1.5 kg per unit = 9,000 kg in cost per unit. Therefore consider favorable since the cost is similar with budgets.
  • Labor Cost: 1/2 hour can produce 2 units, therefore 5,500 units should be used only 2,750 hours but not 2,850 hours.
  • Since $7 labor paid per hour, therefore additional 100 hours (2850 - 2750 = 100) used for produced 5,500 units and extra $1,555 (20805 - 19250 = 1555) spent.

table 2.2.2: per unit basis statement of Flatland Inc.

Based on the comparison of column Actual and Standard inside table 2.2.2, we know the operating profit reduced due to labor cost per unit increase but the rest keep unchanged. Provided the question mentioned only below elements:

  • 1/2 hour produced a unit
  • labor paid is $7 per hours
  • 8,250 kg raw materials used to produced 5,500 units.
  • A unit use 1.5 kg raw materials

2.1.2 Answer 2

  • The terms of favorable is the actual cost or expense is less than standard or budget. The revenue better than budget is consider as favorable as well since as long as the statement is more benefit and profitable than budget/standard.
  • When the actual result is worst than budget or standard, then it will be calsiffied as unfavorable.

2.1.3 Answer 3

  • Based on table 2.2.1 and table 2.2.2, the labor cost per hour has increase to $7.3 per hour from $7 per hour. Therefore 0.3 ÷ 7 = 4.29% additional cost.
  • For the raw materials, the actual cost is same with standard.
  • The labor cost increased might be due to unskill staffs which reduced the productivity. However fortunately the cost of materials do not increase means the staffs have not missed use or waste the materials for production.

2.2 Part 2: Revenue Variances

Question:

Using the information provided in the Assignment Details section of the Instructions tab, respond to the following:

  1. Calculate the revenue variances (sales price, sales mix, and sales activity) for both the Standard and Super models. Please provide supporting calculations, label your variances by name, and designate them as favorable or unfavorable. Note: If the given information is insufficient for answering any part of the above question, please denote that clearly, and identify the piece of information you are missing.
  1. Provide at least two potential explanations for each of the variances (i.e., six) that you calculate. If you were to investigate these variances, who would you speak to in order to collect information relevant to your investigation?

Answer:

2.2.1 Answer 1

table 2.2.1.1: financial statement of standard models.

table 2.2.1.2: financial statement of super models.

  • Above two tables summarized from table 1.1.3.2
  • Only Budgeted CM per unit but no Actual CM per unit figure provided.

2.2.2 Answer 2

table 2.2.2.1: summary of the production and sales strategy.

According to the above, the sales mix of Standard and Super changes from 80%/20% (Budget) to 70%/30% (Actual).

  • With changed the sales combination, there was benefit to the total revenue (Standard and Super) from $1640000 to $2397500.

  • Due to insufficient information provided, the CM could not be determined in order to measure the effectiveness of both sales and expenses between the actual and budgeted.

  • The allocation of the direct and indirect costs, fixed cost, customer behavior and market demand are all the factor to influent for both sales and profit margin of the products.

3. Conclusion

## Part 1:

                              Actual    Budgeted
Units                         5,500     6,000     Unfavorable
Sales                         $132,000  $120,000
Less: Var. costs
Direct materials              $22,275   $23,400
Direct labor                  $20,805   $21,000
Manufacturing overhead        $15,860   $16,500
Total variable costs          $(58,940) $(60,900)
Contribution margin           $73,060   $59,100
Fixed manufacturing overhead  $(26,500) $(25,000)
Operating profit              $46,560   $34,100
Operating profit (%)          35.27%    28.42%


1. Standard for producing 5,500 units
                  Standard  Actual    Var
Direct materials  8,250 kg  8,250 kg  -       Favorable
Direct labor:
Hours             2,750 hr  2,850 hr  100 hrs Unfavorable
Wages             $19,250   $20,805   $1,555  Unfavorable

Remark:
  - Direct material: Standard is 1.5kg /unit
  - Direct labour  : standard is 1/2 hr per unit at wages $7/hr


2. If the actual revenue, cost or expenses is better than the standard or budget, those will be classified as favorable.

  - If the actual revenue, cost or expenses is worst than the standard or budget, those will be classified as unfavorable.


3. For direct material, the actual cost per unit aligned with the standard but the direct labour cost did not.

  - The actual direct labour cost was $7.3 vs standard $7 per hour. It was over $0.3 (4.29%) to standard. The differences might due to the experience and skills of the labour. In addition, the effectiveness of the machinery might also as a factor to decrease the productiveness.



## Part 2.

                      Standard  Super
                      Budgeted  Actual      Var Budgeted  Actual    Var
Sales (units)         3,200     3,500       300 Favorable 800       1,500       700   Favorable
CM (unit)             $210      $550
Selling price (unit)  $300      $325        $25 Favorable $850      $840        $(10) Unfavorable
Revenue               $960,000  $1,137,500      Favorable $680,000  $1,260,000

Remark: No actual CM per unit was provided.

Sales (Units)
          Budget      Actual
Standard  3,200 80%   3,500 70%
Super     800   20%   1,500 30%
Total     4,000 100%  5,000 100%

Remark: According to the above, the sales mix of Standard and Super changes from 80%/20% (Budget) to 70%/30% (Actual).

  - With changed the sales mix, there was benefit to the total revenue (Standard and Super) from $1,640,000 to $2,397,500.

  - However, as there was insufficient information provided, so the CM could not be determined in order to measure the effectiveness of both sales and expenses between the actual and budgeted.

  - The allocation of the direct/in direct cost, fixed cost, customer behavior and market demand are all the factor to influent for both sales and profit margin of the products.

As mentioned in section [Speech and Blooper], I need to self improve in financial statement analysis section but also products my research Analyse the Finance and Stocks Price of Bookmakers.

4. Appendices

4.1 Documenting File Creation

It’s useful to record some information about how your file was created.

[1] “2016-07-27 02:12:37 JST” setting value
version R version 3.3.1 (2016-06-21) system x86_64, mingw32
ui RTerm
language (EN)
collate English_United States.1252
tz Asia/Tokyo
date 2016-07-27
sysname release version nodename “Windows” “10 x64” “build 10586” “RSTUDIO-SCIBROK” machine login user effective_user “x86-64” “scibr” “scibr” “scibr”

4.2 Versions’ Log

4.3 Speech and Blooper

I do appreciate that University of Illinois at Urbana–Champaign provides the Improving Business Finances and Operations specialization via Coursera. I used to study Certified Accounting Technician (CAT) course at PAAC more more decade. Now I need to review the finance and accounting course prior to conduct my research Analyse the Finance and Stocks Price of Bookmakers. There are few books that I need to read for further understanding. - Managerial Accounting - Financial Statement A Step-by-Step Guide to Understanding and Creating Financial Reports by Thomas R. Ittelson 2009

4.4 References

  1. NA